Earnings Call Transcript - PZZA Q2 2022

Operator, Operator

Good day, and thank you for standing by. Welcome to the Papa John's Second Quarter 2022 Conference Call. 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 today, Mr. Stacy Frole. You may begin.

Stacy Frole, VP of Investor Relations

Thank you. Good morning, and welcome to our second quarter earnings conference call. This morning, we issued our 2022 second quarter 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 at investor_relations@papajohns.com. On the call this morning are Rob Lynch, our President and CEO; and Ann Gugino, our CFO. 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-ups. Rob?

Robert Lynch, CEO

Thank you, Stacy. Good morning, everyone, and thanks for joining us today. Before we begin, I'd like to welcome Stacy to our first Papa John's earnings call since joining the company in May. Many of you have already met with her, or will have the opportunity soon, as we ramp up our outreach and shareholder engagement over the coming year. She has a very strong finance and IR background and we're excited to have her as a part of our team. This morning, my remarks are going to focus on Papa John's top line sales growth, how we're navigating this dynamic environment, and our continued development momentum. I want to start off by saying, I'm so proud of our team members and franchisees. Thanks to their hard work and dedication, we delivered our 12th consecutive quarter of positive comparable sales in North America, building on our significant gains over the past two years. We delivered these results despite an increasingly difficult macro environment. This proves the resiliency of our differentiated brand, product innovation, digital capabilities, and winning culture. In fact, weekly per store average sales across every one of our markets are higher today than they were before the pandemic, and our franchisees continue to grow and prosper. That being said, accelerating commodities and labor costs impacted unit economics, margins, and operating income in the second quarter. But with continued strategic price increases and the strong performance from our premium priced menu innovations, we were able to partially, but not completely offset these higher costs. As consumer sentiment continues to soften, I'd like to reiterate a point I've made before: pizza offers tremendous value relative to other QSR, fast casual, or casual dining concepts. For this reason, the segment has been historically resilient through past economic cycles. Because we invest in better ingredients, consumers recognize the superior value already offered by Papa John's Pizza and can feed their family a delicious, high-quality meal very affordably. As we have discussed in the past, our loyalty program and one-on-one marketing capabilities offer more price-sensitive customers compelling incentives to order our high-quality pizza at great value. At the same time, those customers who are less price-sensitive are targeted with opportunities to self-select into our premium innovations, bifurcating our customer base and maximizing profitability for our restaurants. We are navigating this dynamic environment with a balanced approach to optimize short-term results while investing for our future. This positions us even better for long-term growth and margin accretion when the commodity cycle reverts and costs eventually normalize, which we expect heading into 2023. Our long-term perspective and optimism are also reflected in our franchisees' development activities. We continue to open new stores and sign significant new development deals further validating and supporting the brand's long-term potential. In the second quarter, we delivered positive sales growth on top of best-in-class growth over the last two years. Comparable sales in North America rose 1%, contributing positively to a three-year stack of 34%. Driving these positive comps were premium menu innovations, technology integrations with third-party aggregators, and our revenue management capabilities, which allowed us to strategically execute pricing actions while maintaining demand. Our brand's unique promise of better ingredients, better pizza combined with our menu innovations and Papa Rewards loyalty program enables us to provide strong value to each customer segment at the right price. In the current environment, there is always temptation to chase transactions through aggressive discounting. As we evolve our revenue management capabilities, we have instilled a disciplined approach to provide the right promotions to the super value-oriented customer without risking the erosion of our brand or pricing integrity. Since the beginning of the year, menu prices on average at Papa John's have risen approximately 7% to 8% system-wide. From a menu innovation standpoint, our Epic Pepperoni-Stuffed Crust Pizza introduced in April has been a huge hit with customers. It is strengthening our stuffed crust menu platform, which is driving orders and some of the highest percentages of customers expressing an intent to repurchase that we've ever seen. We're also excited about our innovation pipeline for the second half of the year, as we balance the introduction of new innovations with bringing back fan favorites. Additionally, our efforts over the past few years to build strong partnerships with each of the nationwide third-party delivery aggregators continues to be a strategic differentiator for us. We are dedicated to meeting our customers with AR and these partnerships provide us with a new opportunity for consumers to discover our brand through an incremental sales channel and an ability to leverage their incremental delivery capabilities, particularly at peak times. In our international business, comps declined 8%, though still delivered a three-year stack of 19%. These results primarily reflect declines in the UK, our largest international market, which is experiencing some of the same challenges that we are facing here in the U.S. and some unique to the UK. They have seen record high inflation, the lapping of government stimulus, the holiday, and the lifting of COVID restrictions, which may have disrupted normal industry seasonality last year. As we mentioned on our first quarter call, we have strong leadership overseeing our international business in the UK. This team is focused on differentiating the brand from our competitors, growing our share in existing markets, and efficiently scaling in new markets. Excluding the UK, our other international markets remained healthy in the quarter, lapping two strong years of positive comp growth. In the UK specifically and our international markets more generally, we see enormous opportunities to apply the model we have developed in the U.S., including our revenue management capabilities, product and technological innovation, and third-party delivery relationships. To achieve significant gains in restaurant-level profitability in the future, which will help fuel further development acceleration outside the U.S. After two years of double-digit comp growth, when our top priorities were keeping our employees and customers safe and meeting customer demand, today we're operating in a very different environment. This is providing the impetus to focus our innovation mindset on our operations to improve customer service and delivery capabilities and efficiencies, which will grow long-term restaurant profitability across the system. To optimize labor, we are evolving our management tools and systems to improve execution. Over the last few years, we made significant operational changes. We introduced centralized call centers, partnered with third-party aggregators, and improved efficiencies through equipment innovation. With these and more improvements underway, we are currently working to build new labor optimization tools to increase restaurant profitability moving forward. We're extremely excited about our new unit development growth story as there are significant market expansion opportunities in North America and internationally. We already have development agreements in place with nearly all of our top 25 North American franchisees versus only three in 2019 and we are actively pursuing new deals with highly experienced, well-capitalized franchisees around the globe. In the second quarter, we opened 47 net new units consistent with our expectations and plan to open between 280 and 320 net new units for the full year in 2022. We continue to sign new deals, which further reinforces our confidence in our multi-year development goal to grow global net units by 6% to 8% annually for fiscal 2023 through 2025, continuing the acceleration we have seen over the past year. When franchisees open up a new Papa John's restaurant or sign a new development deal, they're making a long-term investment decision. Q2's solid development activity and new deals are a strong indicator of our brand's long-term momentum and profitable growth potential. Now, I'd like to turn the call over to Ann to discuss our financial results in greater detail. Ann?

Ann Gugino, CFO

Thanks, Rob, and good morning, everyone. As you read in our earnings release this morning, we continue to deliver top line growth on top of significant gains over the past two years. For the second quarter, global systemwide sales were $1.2 billion, up 2.6% in constant currency. Accelerating net unit growth, particularly in international markets contributed to systemwide sales growth in the second quarter in addition to our sustained positive North American comp sales. As Rob just mentioned, this growth is a great example of the strength of our brand and our franchisees' excitement to invest in it. Comp sales in North America were up 1.4% across franchise restaurants and down 1.5% in company owned restaurants. Like the first quarter, the difference largely reflects localized differences in the economy. In markets with both franchised and company-owned restaurants, we saw similar performance in the quarter. International comps were down 8% in the second quarter, reflecting the continued softness in the UK, Rob mentioned earlier. Partially offsetting the UK performance were solid comps from our other international markets, including the Middle East and Latin America. Consolidated revenue increased 1.5% to $522.7 million in the second quarter largely driven by commissary revenues tied to higher commodity costs. Excluding the impact of our strategic refranchising of a 90 restaurant joint venture in the first quarter, total company revenues increased 5.2% versus the prior year. The year-over-year impact of this strategic refranchising was most pronounced in revenue as revenues from the JV were no longer consolidated in restaurant sales revenue and instead recorded in royalties and commissary sales. Its impact on adjusted operating income was less than $1 million and neutral to the EPS consistent with our previous announcement. Turning to margins. Adjusted consolidated operating income for the second quarter was $40.4 million compared with $48 million for the second quarter of 2021. Adjusted operating margins were 7.7%, down from 9.3% last year and down sequentially from 8.3% in the first quarter. As we discussed on our last call, we expected adjusted operating margins to decline sequentially due to the acceleration of inflation we were seeing in our company-owned restaurants. This inflation was even greater than initially anticipated. Food basket costs were up 18% in the quarter, impacted by accelerating cheese costs. Labor costs also remained elevated in the quarter. Together, these factors represented nearly 800 basis points of headwind for corporate restaurant segment margins year-over-year. Strategic pricing actions reduced the impact of this record inflation resulting in a 400 basis point decline in restaurant level margins year-over-year. The cost headwinds we experienced in the corporate restaurants were also somewhat offset by a $7.2 million decline in general and administrative expenses. Commissary revenues rose 17.5% in the quarter, driven by the continued acceleration of costs. Remember, since our commissary arrangement with North American franchisees passes through food, labor, and fuel costs on a cost plus fixed margin basis, rising costs are slightly accretive to commissary operating income but dilutive to consolidated operating margins. Altogether, these factors were an approximate 160 basis point drag on second quarter adjusted corporate operating margins in line with the reduction we experienced in Q1. Going forward, we expect commodity costs in particular cheese and wheat will remain elevated in the near term before beginning to moderate towards the end of the year. Longer term, we expect to fully offset the impact of increased food and labor costs through strategic pricing actions and productivity initiatives. However, as we saw in Q2, these cost pressures are immediate and strategic pricing must be executed carefully as to not significantly impact demand. We will continue to take a surgical approach, being mindful of retaining the strong customer base and positive momentum we've built over the past three years. It's important to understand that the decisions we are making focus on optimizing results in the near term while leaning into our differentiated strategy and securing our growing market share position for the long term. We are confident that when the current headwinds normalize, we will be in an even better position for long-term growth and margin accretion. Continuing to earnings. For the quarter, on a GAAP basis, diluted earnings per share were $0.70 versus a loss of $2.30 last year, including $0.04 and $3.23 in special items respectively. Recall included in the 2021 special items was a one-time cost of $3.15 related to the repurchase and conversion of the Series B preferred stock. Excluding these special items, the second quarter adjusted earnings per diluted share was $0.74, down from $0.93 a year ago, primarily reflecting margin compression in our corporate restaurants and the lower international performance, which included approximately a penny and a half of headwind from year-over-year foreign currency exchange rates. Now turning to cash flow and the balance sheet. For the first six months of the year, net cash provided by operating activities was $45.6 million. After deducting $30.7 million in capital expenditures for the development of new domestic restaurants and investments in technology innovation, we generated free cash flow of $14.8 million. This was down from $100.1 million from the first six months of 2021 reflecting the impact of our overall business performance, working capital changes, and a $9 million increase in capital expenditures. We ended the second quarter with ample liquidity more than $500 million in cash and borrowing available under our revolving credit facility and have a conservative gross leverage ratio of 2.3 times. We also continue to return significant cash to our shareholders. Last quarter, we repurchased $42.8 million in shares with an additional 20 million repurchased after the quarter as of July 28. In total, we have repurchased more than 975,000 shares since the beginning of the year. We also paid out $12.5 million in common dividends during the quarter. In addition, based on our strong balance sheet and our positive outlook, our Board has declared a 20% increase in our 2022 third quarter dividend to $0.42 per share or $1.68 annualized. Our capital structure provides us with the substantial operating flexibility. We'll continue to take a disciplined and balanced approach to managing our cash flows to maximize value for our shareholders through organic growth opportunities, share repurchases, and cash dividends. Now to our outlook. with new menu innovations, the return of fan favorites, strategic pricing actions, and targeted offerings for our most value-conscious customers. We expect North America comp sales to continue their three-year positive trend for the second half of the year. As for international, we expect softness in the UK to continue into the second half of 2022 and then to improve into 2023 as strategic initiatives are executed. Since the UK currently represents more than 20% of our international sales, these headwinds will result in international comp sales being down for the full year but up high-single digits on a two-year stack. Regarding adjusted operating margins, we expect near-term pressure to continue from lower UK contributions and while commodity costs remain elevated and wage inflation continues. For the full year, we now anticipate a decline in consolidated operating margins between 100 basis points to 150 basis points when compared with 2021. We do expect to see margins improve heading into 2023 as operational productivity initiatives are executed and costs begin to normalize. We continue to target fiscal 2022 CapEx of between $75 million and $85 million as we invest in technology innovation and the development of new company stores. Full year net interest expense is expected to be approximately $25 million. We expect the tax rate for the remaining quarters to range between 20% and 22% and for the full year to be between 18% and 20%. I want to close by saying how proud I am of our team and their ability to evolve and adapt to every possible scenario that has been thrown their way over the past few years. We operate in an attractive global market that offers significant white space. With strong AUVs and a robust development pipeline, I'm confident our long-term development opportunities and our ability to drive steady earnings expansion to sustainable comp sales growth will continue to deliver significant value for our franchisees, our team members, and our investors. I'm excited for the future of Papa John's, and with that, I'll turn the call back over to Rob for some final comments.

Robert Lynch, CEO

Thanks, Ann. As you've heard from us today, we continue to drive growth by executing on our strategy while being agile in the current environment and sensitive to the additional pressures our customers are facing. We are a company with a proven brand, loyal customers, and solid underlying cash flows that can be used to support value-enhancing initiatives in the future. Our system remains healthy and strong, and I'm more excited than ever about the future. With that, I'll turn the call over to the operator for Q&A.

Operator, Operator

Certainly. And our first question will come from Chris O'Cull of Stifel. Your line is open.

Chris O'Cull, Analyst

Thank you. Good morning, guys. I had a clarification on the outlook and then a question. And did you say that you expect North America comps to remain positive for the balance of the year or did you give more specificity on that?

Ann Gugino, CFO

Yeah, that was the guide was that we expect North American comp sales to be positive in the back half of the year.

Chris O'Cull, Analyst

Okay. Thank you. And then, Rob, it appears the larger chains are starting to promote price point value and discounts for limited times. And I know you said that Papa John's is not going to lead with price point value and discount, but as consumer spending slows, can you elaborate how the company's marketing strategy could evolve? And then how does the company determine the level of transaction declines it's willing to accept to avoid that discount type strategy?

Robert Lynch, CEO

Hi, Chris. We have said that we've been pretty consistent in the past that we're not going to promote national deep discounts. I think we're pretty much the only pizza player that's delivering positive comps. I think that there's something to being able to deliver positive comp sales and better transactions without having to go and race to the bottom for the lowest price points. That being said, we absolutely deliver value. We deliver value locally. A discount in San Francisco is different than a discount in Atlanta and Ohio. Our co-ops all have funds that they contribute into that they can use to manage their markets the way they need to manage them depending upon the price sensitivity of their customers in that region. It’s not accurate to say that we don’t have value platforms and promote value. We just don't do it at the national level and kind of peanut butter across the country. The other way we're really focused on delivering values through our loyalty program. I mean, we have 25 million loyalty members at this point and we're able to surgically deliver incentives that motivate people in different ways to drive transactions. So we have a very robust value strategy, it's just not the same as everyone else going out and putting the lowest price point on national television.

Chris O'Cull, Analyst

Excellent. Thank you.

Operator, Operator

And our next question will come from Eric Gonzalez. Your line is open.

Eric Gonzalez, Analyst

Hey. Thanks. Good morning. I want to ask about the UK because it seems like the consumer might be deteriorating at a faster rate than in the U.S. So I'm really wondering what the strategic plan is for that market? I think you mentioned doing something in 2023 or laying those groundwork, but how might that plan differ from what you might do in the U.S? Should the domestic economy deteriorate more rapidly?

Robert Lynch, CEO

Thank you for the question, Eric. The U.K. market is quite distinct, particularly regarding VAT tax implications, which have been noted in previous calls. These factors significantly influence our comparisons. Their pricing structure and the way taxes are incorporated into prices and revenue streams differ considerably from the U.S. Unfortunately, these VAT tax implications are unavoidable. Everyone has acknowledged this. Regarding our core business, we haven't yet developed the same capabilities in the U.K. as we have in the U.S. For instance, our revenue management system in the U.S. allows us to collect purchase data from nearly every transaction in our restaurants. This data, combined with insights from our loyalty programs, helps us understand customer buying patterns and timing. We utilize this information to closely manage price elasticities in both our company-owned restaurants and franchise operations. In the U.K., we haven't implemented these systems yet, highlighting a capability that we could easily transfer to other markets. The U.K. is our largest and most crucial international market, but we plan to implement these strategies across all our regions. We are focusing on improving our operations and enhancing our media purchasing and advertising strategies. The initiatives we are developing in the U.S. have not yet been introduced to other markets, but I believe they hold significant potential for improving our comp sales and PSA growth in those areas. We consistently emphasize that international markets present a substantial opportunity for expansion, and we are increasingly confident that our U.S. tools can effectively drive comp sales and PSA growth when applied to these other markets.

Eric Gonzalez, Analyst

Thank you.

Robert Lynch, CEO

Thanks, Eric.

Operator, Operator

And our next question comes from Brian Bittner of Oppenheimer. Your line is open.

Brian Bittner, Analyst

Thanks. Good morning. morning, Rob and Ann. The fact that you did keep North America comps positive in the second quarter, it was actually very impressive and represented actually an acceleration on a three-year basis. And it's also impressive Ann that I think you said you anticipate the three-year trend to continue in the second half of the year. I think I heard you correctly. So this result and this outlook is happening despite a lot of mixed messages that we're getting on how the consumer is behaving more recently. A lot of people are talking about weakness at the lower end. Are you seeing any noteworthy changes in behavior within your own business? And Rob, what levers do you believe the brand has to pull if we do enter a much more decisive slower spending environment?

Robert Lynch, CEO

Great question, Brian. One significant change in consumer behavior that I want to highlight is the return to travel. As a traditional quick-service restaurant, we are generally unaffected by people going on vacation since many travelers are on the road and using drive-throughs. However, vacation impacts our business as we rely on planned dinner purchases. We’ve always noticed seasonality in our business, especially during summer vacations. The last two years saw a decline in this seasonality due to fewer people traveling, particularly internationally. This year, we are indeed experiencing that seasonality again. Leading up to June, our comparable sales were showing strong growth, and we felt confident about exceeding our expectations. However, we observed a slowdown in June, which we believe is linked to the resumption of travel behavior. We can see this trend in regions like Florida, where our performance has improved significantly. We are optimistic about the second half of the year, anticipating growth after we navigate through more challenging comparisons in the summer months. Regarding value, we do offer competitive pricing, like our $8 carryout special for large pizzas available in almost every market. While we have low price points, we approach them in a unique manner. With 75% of our business coming from e-commerce, our customers access our app and website for price points and localized offers readily available in those digital spaces. We are capable of attracting value-conscious customers; we just have a different strategy for doing so. So far, our differentiation has helped us perform well.

Brian Bittner, Analyst

Great. Thank you.

Robert Lynch, CEO

Thanks, Brian.

Operator, Operator

And our next question will come from Alexander Slagle of Jefferies. Your line is open.

Alexander Slagle, Analyst

Thanks. Good morning. I had a question on people and I guess, the company stores and franchise stores that's known and if you can kind of comment on retention and wage levels and hiring activity and just trying to get a sense for how the improved people culture and all the efforts around purpose and values and initiatives to take care of your employees is permeating further through the system and perhaps helping on a relative basis. I know, it's still a very difficult environment out there, hiring and keeping people and just wondering if you could talk to that.

Robert Lynch, CEO

Thank you for your question, Alex. Staffing has always been a challenge in this industry, and it has been our primary difficulty throughout the pandemic for obvious reasons. For the past two years, our restaurants focused on maximizing hours in the stores, with less attention on productivity or overtime; the priority was simply ensuring we had enough staff to make and deliver pizzas. However, staffing has improved in recent months, with better recruitment and retention levels, which is very encouraging. As Ann mentioned, our labor costs have risen due to wage inflation, which we anticipate will stabilize to some degree moving forward. This increase in labor costs is also tied to our approach over the past two years, where we prioritized every available hour in the restaurants. Our new leadership in the U.S. operations group is dedicated to not only staffing and recruiting but also ensuring that we do so in the most efficient and productive manner. We have talented individuals working on this, and the insights and processes we develop will benefit not only our company stores but also our franchisees, helping them manage their labor more effectively. This should lead to improved productivity and margins, supporting our ongoing domestic growth.

Alexander Slagle, Analyst

Got it. Thank you.

Robert Lynch, CEO

Thanks, Alex.

Operator, Operator

Thank you. And our next question will come from Lauren Silberman of Credit Suisse. Your line is open, Lauren.

Lauren Silberman, Analyst

Thank you so much. Rob, you spoke to the challenging consumer environment. You're lapping over some pretty tough comps in the back half, especially when including 2019. So can you talk about the most meaningful drivers of comps? And it sounds like you're embedding an acceleration through the quarter, so just want to confirm that? And then just related, you highlighted the value opportunity from the loyalty. Where are you guys in your journey with respect to personalization and your ability to offer specific promotions, more value-oriented consumers? Thank you.

Robert Lynch, CEO

Thanks, Lauren. We are confident in the second half of the year for a few key reasons. Firstly, we have new innovations coming in the next few weeks, along with additional innovations scheduled throughout the year. We believe these exciting new items will enhance the success we've had with our stuffed-crust platform, which we launched last year and significantly increased our average unit volumes. The launch of Epic Pepperoni also brought noticeable revenue and margin gains. Looking ahead, we have fresh ideas that we think will complement these successes, and we are thrilled about our innovative plans. Secondly, our growing expertise with data enhances our confidence, particularly regarding customer loyalty. We have a wealth of data from our e-commerce operations, and our teams have spent the last two years improving our data analysis capabilities. Our strategy is geared towards establishing a strong presence in this industry's value segment, and we are increasingly confident in how we use this data to connect with customers through both organic and paid channels. We are utilizing paid media to specifically target customers most likely to purchase our products, including reaching out to lapsed or infrequent customers. Our confidence comes from the revenue potential and the positive trends we observe, along with ongoing improvements in our margins. It's not solely about achieving positive comps; it's about ensuring those gains are profitable, which is why we are cautious about offering extensive discounted national pricing without a clear strategy.

Lauren Silberman, Analyst

Thank you very much.

Robert Lynch, CEO

Thanks, Lauren.

Operator, Operator

And our next question will come from Brian Mullen of Deutsche Bank. Your line is open.

Brian Mullen, Analyst

Hey. Thank you. Just a question on development. I know it's a bit early here, but as you think about the guidance range of 6% to 8% over the next couple of years. As you start to think about 2023, what are the factors that might cause you to come in towards the lower end or the higher end of that? Is there anything you're monitoring either optimistically or cautiously just outside of like equipment permitting delays, which we all understand can create hiccups, just really any color on how you're feeling about that multiyear ramp?

Robert Lynch, CEO

So we continue to sign agreements and feel really great about the franchisee excitement around this brand globally both in our markets that we're currently in, but underpenetrated as well as new markets. To answer your question, I would tell you the only thing that is unforeseen right now is some of the conflicts. The conflict that we're seeing in Ukraine continues on and that impacts that region. And so we're continuing to watch the global environment and make sure that we can support our franchisees and our development capabilities despite any of that.

Brian Mullen, Analyst

Thank you.

Operator, Operator

And our next question will come from Peter Saleh of BTIG. Your line is open.

Peter Saleh, Analyst

Great. Thanks. I want to come back to unit development, just ask it a different way. I guess, given the softness that you're seeing in the UK and international. Does that have any impact whatsoever on the goal of getting to 6% to 8% annual growth starting in ’23? Are you seeing any pushback or any pullback from franchisees internationally? And then secondly, can you just talk about what you expect on company unit development this year and maybe on a go-forward basis? Thank you.

Robert Lynch, CEO

Thank you, Pete. We are experiencing a strong year outside the UK for our international business. There are very promising areas such as the Middle East, and even Spain and Continental Europe, which have traditionally been tough markets for us, are showing significant growth this year. We feel positive about nearly every market outside the UK, and we are not overly concerned about global development. However, the UK, while our largest developed market and a significant contributor to our current results, represents just a small fraction of our international development potential. That said, we are closely monitoring the situation. Given the current volatile global environment, we remain as confident as ever regarding the excitement surrounding our brand on an international scale. In terms of company development, we've opened 12 restaurants in the past year and are assessing their performance, which serves as a measure of our strategy to enter established markets and establish our presence. This is a long-term approach, and we are paying attention to how these restaurants do. I should mention that many of these locations opened in Q4 of last year, and as we moved into Q1, staffing these new restaurants proved to be challenging. We are focused on a long-term strategy to ensure these restaurants are set up for success and to evaluate their impact on the markets over time. Looking ahead to the next year, we plan to open company restaurants in the double digits, but this will depend on our confidence in being able to open them successfully to maximize their chances for success.

Peter Saleh, Analyst

Thank you.

Robert Lynch, CEO

Thank you.

Operator, Operator

And our next question will come from Andrew Strelzik of BMO. Your line is open.

Andrew Strelzik, Analyst

Good morning. Thank you for taking my question. I wanted to ask about the commissary profit dollars. You mentioned inflation's impact, but we're not seeing it reflected this year. Can you explain what's happening? Is it a timing issue? Additionally, has your outlook for commissary profit dollars changed for this year, and how does this affect the operating margin outlook? Thank you.

Ann Gugino, CFO

Sure. So the impact on the operating margin is really more from a mix perspective just because you're seeing such a large sales increase because of the commodities inflation and you've got that relatively fixed lower margin. Generally speaking, as I talked about, we pass through those costs on a fixed margin basis. And so we do believe on a full year basis that will translate into increased commissary operating income dollars year-over-year. We still think that's going to be in the high-single digits. We didn't see the year-over-year accretion in Q1 given the acceleration of costs and just the timing to recapture. We definitely caught up a bit here in Q2, but we definitely have more to come in the back half. So yeah, we're still confident that we will deliver the high-single digit operating income increase for the commissary line.

Operator, Operator

Moving forward, our next question will come from Nick Setyan of Wedbush. Your line is open.

Nick Setyan, Analyst

Thank you. I believe there was a mention of 7% to 8% menu pricing year-over-year. As we consider the second half, what are our expectations for incremental pricing and its impact on total pricing year-over-year? Is this factored into the expected acceleration in comparable sales for the second half?

Robert Lynch, CEO

Great question, Nick. We are planning some pricing adjustments in the near future, potentially a couple of hundred basis points. However, we don't believe this will be the primary driver of comparable sales in the latter half of the year. We anticipate some normalization of our cost structure, and we're starting to see early signs of that, which should reduce our need to increase pricing further. During the pandemic, we hardly adjusted prices, and our growth in sales was mainly due to innovations that encouraged consumers to choose higher-end options. Our focus is not on driving sales through pricing increases but rather on managing costs. We will implement some price increases as necessary, aiming to return to the margins we need, which is a significant focus for us. We believe getting back to a healthy margin structure will be more influenced by the normalization of commodity prices rather than necessitating substantial additional price hikes. You are correct about the current 7% to 8% figure; that reflects what we have implemented year-to-date.

Nick Setyan, Analyst

Thank you.

Operator, Operator

And our next question will come from Jim Sanderson of Northcoast Research. Your line is open.

James Sanderson, Analyst

Hi. Thank you for the question. I wanted to follow up on the pricing issue. Is the increase in the second half menu price also included in the year-over-year decline in operating margin of 100 to 150 basis points? What factors could contribute to improving the operating margin towards the higher end of your guidance for the second half of the year? Thank you.

Ann Gugino, CFO

Yeah. The pricing would be baked into that guide on the 100 basis point to 150 basis point decline year-over-year. Just to add a little bit of color there. We've talked a lot about the inflationary pressure in both wage and commodities that we expect to continue in the corporate restaurant. So when you look at it by segment, we would expect the year-over-year margin pressure to be a little bit more pronounced there. The upside to outperform that to Rob's point would be a continued easing of commodity prices. We also talked about a number of investments that we're making in wage and productivity, which as Rob pointed out has not been a huge focus for us. During the pandemic where we were really more focused on that surge in demand, meeting the demand, and keeping people safe. So as those initiatives start to take hold that could provide some upside. We'll continue to see pressure internationally as a result of the UK. But offsetting that as we've talked a lot about is the positive comp sales growth, not just in North America, but as Rob pointed out internationally outside of the U.K. And then we also expect G&A to be down year-over-year in the second half as we continue to take a disciplined approach to cost management. So those would be kind of the high-level insights I would provide.

James Sanderson, Analyst

Okay. Thank you.

Operator, Operator

And our next question will come from Todd Brooks of Benchmark and Company. Your line is open.

Todd Brooks, Analyst

I'm here. I didn't hear that I was announced. Sorry about that.

Operator, Operator

No problem. Your line is open.

Todd Brooks, Analyst

Great. Just two quick follow-ups, if I may. One, on the international, I know and you just talked about expecting positive same-store sales growth in the second half excluding the UK. Was international positive in the second quarter excluding UK and is there any way you can size maybe the drag from what you're seeing in the UK?

Ann Gugino, CFO

So yes, the other international markets excluding the UK were positive in Q2. In terms of size, I think that what I would offer is that the UK in terms of percent of international system sales was about 20%. So that would be kind of the guidance there. And we were definitely down double-digits in the UK.

Todd Brooks, Analyst

Okay, great. And then one other quick follow-up. Rob, you talked about better success with staffing in the last few months. If we parse that specifically to driver staffing, have you seen the type of staffing improvement there in that specific function?

Robert Lynch, CEO

Slowly, but surely. I don't mean to imply that we are fully staffed. We're nowhere near where we want to be but leveraging our partnerships with the third-party aggregators coupled with a bit of improvement in our organic driver recruiting and retention has definitely helped ease some of the strain on the restaurants. We still have a long way to go, but it's definitely moving in the right direction relative to where we were throughout the pandemic and especially where we were in December and January when Omicron was really impacting our staffing.

Todd Brooks, Analyst

Okay, great. Thanks both.

Robert Lynch, CEO

Sure. Thank you, Todd.

Operator, Operator

I would now like to turn the call back to Rob Lynch for closing remarks.

Robert Lynch, CEO

Well, thanks again everybody for joining us and for your thoughtful questions this morning. As you can tell from our comments today, we're incredibly proud of what our team members and franchisees achieved this quarter and over the past few years. It's been a remarkable three years for this company. Over the last couple of months, we have moved very nimbly guided by our customers to navigate an incredibly volatile and challenging environment. We've stayed true to our values, continuing to innovate and leaning into what makes Papa John's unique. Going forward, we will continue to carefully manage short-term opportunities and challenges with an eye toward our long-term potential. We hope that you're as excited about the future of Papa John's as we are. As always, I'd like to thank our shareholders and everyone on this call for their interest in our company and for their continued support. Thanks and have a great day.

Operator, Operator

This concludes today's conference call. Thank you for participating. You may now disconnect.