Earnings Call
Papa Johns International Inc (PZZA)
Earnings Call Transcript - PZZA Q3 2020
Steven Coke, Vice President, Investor Relations and Strategy
Thank you, and good morning. Joining me on the call today are President and CEO, Rob Lynch; and our CFO, Ann Gugino. Rob and Ann will comment on our business and provide a financial update. After the prepared remarks, both will be available for Q&A. Our discussion today will contain forward-looking statements involving risks that could cause actual results to differ materially from 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. Please refer to our earnings release in the Investor Relations section of our website for a reconciliation of non-GAAP financial measures discussed on this call. Finally, we ask any members of the media to be in a listen-only mode. Now I'd like to turn the call over to Rob Lynch for his comments. Rob?
Rob Lynch, CEO
Thank you, Steve, and good morning, everyone. I'd like to begin by saying that I hope everyone on this call and their loved ones are healthy and safe. It has been and continues to be a difficult time for many in the communities we serve across this country and across the globe. Throughout the pandemic, we at Papa John's have worked to do our part by delivering safe, high-quality food, protecting the health and safety of our team members and customers, and supporting our neighbors. Thanks to our focus on our core values and strategic priorities, and the dedication of our team members and franchisees, last quarter, Papa John's sustained its momentum and delivered double-digit comparable sales growth, higher earnings, and robust free cash flow. As I'm sure you also saw this morning, we announced a new $75 million share repurchase program, effective through the end of 2021. We are certainly pleased with our business momentum and the continuing cash build. We look forward to continuing to balance the best uses of cash as we invest in our future and enhance shareholder returns. This morning, I'd like to cover 3 things: first, our outstanding results, both domestically and internationally; second, our progress against our strategic priorities, which is driving both top and bottom line growth; and third, our business' outlook to continue growing and creating shareholder value now and in the future. But first, I'd like to introduce Papa John's new CFO, Ann Gugino, who joined our team last month. Her appointment concluded a comprehensive search process for a CFO who not only had the highest acumen and best experience but who also shared our beliefs and values, someone who would not only make our business better but could also make our company better. Ann meets those qualifications and then some. She also completes one of the most capable and diverse leadership teams in our industry, something I am very proud of. Our team comprises an unparalleled mix of Papa John's and pizza delivery experience, complemented by proven leaders from QSR, retail, and consumer sectors. Our diversity of backgrounds, viewpoints, and strengths sets the foundation for Papa John's long-term success. Most recently, Ann was Senior Vice President of Financial Planning and Analysis at Target Corporation, providing overall strategy, guidance, and direction in the development and execution of Target's planning, analysis, and capital investment. Her experience in the consumer and retail sector, including her work driving long-term growth and profitability across digital and traditional channels at Target, is highly transferable to our business. I am expecting Ann to be instrumental in helping Papa John's achieve industry-leading profitability, free cash flow generation, and long-term shareholder returns. Papa John's is fortunate to already have a top-notch finance team, and I want to express my deep thanks for their hard work, dedication, and diligence since the beginning of the year. I especially want to thank Steve Coke, our VP of Investor Relations and Strategic Planning, who stepped up as our Interim Principal Financial Officer to lead the team with professionalism and commitment through an unprecedented period. We wouldn't be here today announcing these incredible results without Steve. So now to discuss the outstanding quarter that we just completed. As we reported, North America same-store comp sales rose 24% in Q3, reflecting millions of new and returning Papa John's customers, who continue to rely on Papa John's to safely deliver high-quality delicious food. A good balance of transactions and ticket growth drove these results. As I'll discuss in a moment, strong performance of Papadias and other ticket add-ons, the success of the Shaq-a-Roni pizza and charitable promotion, and more targeted and productive discounting, all contributed to growing customer tickets and gross margins. Transaction volumes also grew, reflecting broader growth in the delivery sector driven by changes in consumer behavior, our expanding partnerships with aggregators, and the rising effectiveness of our media spend and marketing. Internationally, comp sales rose 21% in the third quarter. Our strength across the globe, driven by accelerating growth in the U.K., Korea, and China, far exceeded our expectations. We also continued to reopen stores that had temporarily closed due to local restrictions and curfews. Of our approximately 2,100 international franchise stores, at quarter end, 90 were temporarily closed as a result of COVID-19, down from 225 a quarter ago. Strong top line growth enhanced by operating leverage and cost discipline generated much higher earnings, operating income, and free cash flow in the quarter, in spite of higher commodity costs and the investments we're making to take care of our team members and customers during the pandemic. As a result, we ended the quarter with our strongest balance sheet in terms of our debt-to-EBITDA leverage ratio in nearly 3 years. Our strong financial condition and confidence in Papa John's future make it possible for the $75 million share buyback authorization we announced this morning. In a moment, Ann will discuss our Q3 results. Strong top and bottom line results in Q3 are an outcome of our consistent execution against our strategic priorities this year. Let me begin by addressing how our actions to reestablish the superiority of Papa John's products through innovation have driven Papa John's share gains and outperformance, including last quarter. Beginning in Q4 of last year, an accelerating sense of a new culture of innovation has delivered multiple product, technology, and marketing successes, from Garlic Parmesan Crust to entirely new platforms like Papadias. While we had to adjust our innovation calendar at the onset of the pandemic, we were able to accelerate the launch of new products in Q3. We've successfully done so while carefully managing our operations and supply chain despite big increases in demand and an unprecedented new operating environment. A highlight from Q3 was the Shaq-a-Roni pizza, launched as part of a fundraiser for the Papa John's foundation. This promotion significantly exceeded our expectations. In partnership with our franchisees, we sold over 3 million pizzas, raising more than $3 million for communities to support COVID-19 relief, the fight against racial injustice, Boys & Girls Clubs of America, the United Negro College Fund, and general community involvement. The Shaq-a-Roni success really checks all of the boxes of our innovation strategy. It was a differentiated high-value product that didn't create operational complexity for our stores. It had a differentiated marketing message with a charitable component that supported highly meaningful causes aligned with the brand's values. And finally, we launched it with a unique marketing platform, leveraging our Board member and store owner, Shaquille O'Neal, in a very authentic way. In late August, we also launched the Buffalo Chicken Papadia, a tasty, easy-to-eat addition to our winning Papadias platform, which continues to be a customer favorite. This new flavor was received enthusiastically and quickly became our #2 Papadia. Given its strong results, we expect Buffalo Chicken will become a permanent menu item, expanding the Papadia line from 4 to 5 items. Papadias continued to be a major component of the growth we're seeing in our ticket size, particularly they drive incremental value in sales as additions to orders without cannibalizing our pizza sales. Continuing the menu innovation, late last month, we brought back fan favorite double cheeseburger pizza, along with a new double Cheeseburger Papadia. Consistent with the brand and our focus on food, these items' high-quality ingredients and taste differentiate them from any other product in the market. They feature a huge portion of seasoned beef, melty cheese, zesty pickles, and signature burger sauce, all held together by Papa John's fresh, never frozen 6 ingredient dough. Wow, is it lunchtime yet? We're very optimistic that they will be a big hit. Next, I'd like to turn to our progress against driving superior unit profitability across our system. As I have said before, profitable stores and franchisees are the absolute foundation for a strong brand and long-term growth. Driven by double-digit comp sales growth and despite record cheese prices, third quarter North America median unit profits rose to the second highest level that we have seen in several years, surpassed only by the previous quarter. This was great news for our franchisees and for our company-owned stores' contribution to our bottom line. I want to emphasize that from the beginning of the pandemic, we have made investments and taken decisive actions to protect our team members and customers, including quickly reengineering our ordering and delivery processes and technology to integrate no-contact delivery into our channels and customer experience. It was these actions and the perseverance of our team members and franchisees that built trust with our customers and team members and enabled our corporate and franchise stores to stay open and serve our communities. Turning to technology. One of our competitive advantages is that, at our core, Papa John's is an e-commerce first business, with approximately 70% of our orders placed over digital channels and mobile ordering being our fastest-growing platform. One key aspect of our growth strategy is our partnerships and technology integrations with 3 of the 4 top delivery aggregators. Year-to-date, our sales through aggregators have grown by a factor of over 3x, which contributed to our industry outperformance in Q3. Aggregators continue to be a big part of our profitable growth story, and we are excited to be one of the largest QSR brands on their platforms. Our loyalty and one-to-one marketing platform is also a growth driver and strategic technology priority for us. In our more active segments, in particular, they drive outsized revenue compared to non-loyalty customers. To leverage this, we continue to scale our efforts for greater personalization, all with the goal of unlocking greater customer lifetime value. Next, I would like to discuss unit growth and new store development. Though new store openings were mostly paused in Q3, as expected with permitting still delayed by most local governments, Papa John's improved franchisee investment proposition and a new development team to support it are beginning to bear long-term fruit. Last quarter, we saw an uptick in interest from potential and existing franchisees who are attracted to the brand's growth and profitability, resilient delivery model, and the potential for new retail real estate opportunities opening in the months ahead. We have made good progress ramping up our development efforts to match that interest with new leadership and resources, and early results show it. Last quarter, we signed the largest traditional store development agreement in North America in over 20 years. This deal will accelerate our growth in the important Philadelphia and Southern New Jersey market. Under the agreement, HB Restaurant Group, who joined the Papa John's system in 2019 and already owns 43 restaurants in the Mid-Atlantic area, will open 49 new stores between 2021 and 2028. We're thrilled to see such a committed franchisee expanding within the Papa John's system and look forward to growing with them in many more new and existing franchisees over the coming years. Lastly, I'd like to address the transformation of our organization and brand over the past quarter and year as we build our commitment to diversity, inclusion, and winning. In September, we announced another big step forward against this strategic priority. We announced that we will open a second headquarters in the Atlanta area to complement our existing headquarters in Louisville and our international headquarters in Milton Keynes, U.K., outside of London. Our new hub-based organization, which is the outcome of a process we began in late 2019, is an investment in our long-term growth as well as in our ability to efficiently deliver on the company's purpose, values, and strategic business priorities. We're excited to be expanding in Atlanta, an energetic, diverse global city where we already have a significant presence. It is our largest corporate-owned restaurant market and the location of our newest and most sophisticated QCC. Atlanta is the home of a large number of consumer and QSR brands and provides great access for us to a deep talent pool. Atlanta's world-class airport will also connect us to the domestic and international markets that are key to our brand's future. Our Louisville headquarters, home for 36 years, remains essential to our long-term success. Under the new organizational structure, the majority of our corporate staff will continue to be located in Louisville. Their experience and dedication, providing essential support and managing key infrastructure for our franchisees and customers, will continue to be a bedrock of our business. The third element of our new hub design will be an international headquarters based in our current U.K. offices. Consolidating our international operations in the U.K. allows for greater collaboration and best practice sharing, reduces travel overheads, and leverages our significant resources located there across our international portfolio. We expect to open our new office in Atlanta in the summer of 2021. We look forward to providing updates as we move forward with our plans. Now that I have discussed our strong Q3 results and how progress against our strategic priorities contributed to them, our new CFO, Ann Gugino, will address the quarter's financial results in more detail before I return to discuss our outlook. Ann?
Ann Gugino, CFO
Thank you, Rob. I am excited to be here this morning and look forward to partnering with you and the outstanding Papa John's team. It's a unique moment for Papa John's. Through its value-led transformation and innovation, the company is emerging as a leader in its category, opening enormous opportunities, not only domestically but around the world. I want to thank Steve Coke and my new colleagues in Papa John's finance team for their warm welcome over the past month, the extra effort they've made during the transition, and most importantly, the high-quality work they've been doing over the past 9 months, which has allowed the company to reach this point. I am so very proud to be part of this team. In my role as CFO, my top priorities include driving profitable growth, setting a long-term plan to maximize our potential, and managing our balance sheet and capital to create value for the benefit of our shareholders, franchisees, team members, and all stakeholders. Addressing our investors and analysts on this call, I'd like to say that as CFO, I believe it's a unique privilege to be able to engage with investors and analysts in a 2-way dialogue; on the one hand, communicating the company's results, strategy, and potential; and on the other hand, listening and learning from your perspective. In my experience, this active conversation and engagement with shareholders is absolutely essential to a company's long-term success. Working with Rob and the team, I look forward to continuing to build this relationship with you over the coming months. Now let me turn to our financial results, which mirrored our outstanding operational progress during the quarter. There are 4 highlights I'd like to call out in particular. First, a 22% rise in global restaurant sales last quarter yielded a tenfold increase in adjusted operating income, clearly demonstrating the business' operating leverage, cost discipline, and earnings potential. I'd note we achieved these superior results in spite of higher commodity prices and the investments we are making to protect and support our team members. Second, we produced $134 million in free cash flow, defined as cash flow from operations less capital expenditures and dividends paid to preferred shareholders through the end of Q3. This is a reflection of the strong cash generation capabilities of our operating model. Third, we ended the third quarter with net debt of only $210 million, down $140 million from a year ago and a compliance debt-to-EBITDA leverage ratio of 2.5x, indicating the strength, optionality, and security provided by our balance sheet. And fourth, Q3 was the last quarter of our We Win Together franchise support program. This $80 million investment, in addition to greatly improved sales and unit economics, has left our franchisees in a better financial position than ever. And equally, the significant cash no longer required by this program, including nearly $55 million invested over the past 4 quarters, leaves Papa John's even better positioned to drive earnings and free cash flow growth and, ultimately, shareholder returns. These factors capture, in a nutshell, why I am so excited about Papa John's opportunity. Working with Rob, one of my top priorities is to align our long-term capital allocation and return priorities with the business' growth, cash generation potential, and strong balance sheet to maximize shareholder value. We've taken an initial step today with a new buyback, and I look forward to developing a comprehensive long-term capital allocation strategy for the future. Now I'd like to turn to our Q3 results. I'll then address some specific points around our outlook, including expected one-time costs associated with our corporate realignment. In the third quarter, we reported earnings per diluted share on a GAAP basis of $0.35 compared to a loss of $0.10 a year ago. Excluding a $0.03 net impact from special charges in the prior year, adjusted earnings per diluted share rose from a loss of $0.07 a year ago to $0.35 this year. The $0.42 year-over-year increase reflects a $0.44 positive benefit from improved operating results, primarily driven by our continuing impressive North America comparable sales. This was slightly offset by a $0.02 negative impact from the allocation of undistributed earnings to participating securities, primarily the Series B preferred shareholders. Per GAAP, we compute earnings per common share using the 2 class method. This means that in addition to preferred stock dividends and accretion, a portion of undistributed earnings that would be attributable to participating securities on an as converted basis is also deducted from net income at the company level to determine earnings per common share. Note, because the company did not have undistributed earnings before Q2 of this year, that is, our net income did not exceed our common and preferred dividend payments, we had not recorded this deduction to common earnings per share. To clear up any potential confusion about this accounting treatment, we have provided an additional table in this morning's earnings press release. Turning now back to Q3 results. In the quarter, we provided $13.5 million of support to franchisees under the We Win Together program, our last quarter, as I mentioned, compared to a total of $11.4 million in support a year ago. On a per-share basis, this amounted to approximately $0.31 for the quarter compared to $0.28 a year ago. In the third quarter of 2020, pretax income on a GAAP basis was $20.9 million compared to approximately $700,000 in 2019. Consolidated third quarter revenues rose 17.1% to $472.9 million. Excluding the impact of refranchising 46 domestic restaurants in 2019, consolidated revenues increased approximately 20%. The increase was primarily due to strong comparable sales, as we've described, which drove higher North America commissary revenues, sales for domestic company-owned restaurants, North America franchisee royalties, and international revenues. Now turning to cash. As I previously described, free cash flow was $134 million in the first 9 months of 2020 compared to $15.8 million a year ago. The $118 million increase was driven by higher net income as well as favorable changes in working capital items, including the timing of payments associated with our marketing fund. We paid a cash dividend of $10.8 million to our common and preferred shareholders during the third quarter of 2020. Subsequent to the third quarter, on October 30, 2020, our Board of Directors declared fourth quarter cash dividends of approximately $10.8 million to be paid to common and preferred shareholders. The fourth quarter common stock cash dividends will be $0.225 per common share. The new $75 million share repurchase authorization is an additional option we are making available on top of our dividend to enhance shareholder value. With this buyback, our intent is to opportunistically repurchase shares in the open market. The buyback is the logical outcome of our healthy cash position and confidence in Papa John's near and longer-term prospects. I want to emphasize, however, that we see the buyback as one piece of a larger multifaceted long-term capital allocation and return strategy. I look forward to providing more color in the future. Now turning to restaurant development. During the third quarter, we opened 14 restaurants in North America and closed 12 restaurants for a net increase of 2 restaurants. Internationally, we opened 40 restaurants and closed 29 restaurants for an increase of 11 restaurants. These changes in our unit count exclude any temporary closures as a result of the COVID-19 pandemic. As you know, we withdrew our 2020 guidance at the start of the pandemic, given the volatility and business uncertainty we have faced and have not replaced it. However, I would like to address 3 specific items related to our outlook and reporting. First, to reiterate my prior comments, we will continue to record an expense for the allocation of undistributed earnings to participating securities whenever net income exceeds common and preferred dividends. This means that, hypothetically speaking, if fourth quarter net income attributable to the company comes in the same as Q3, we will again incur $0.02 of expense for the allocation of undistributed earnings to participating securities. Second, we expect to incur approximately $15 million to $20 million in one-time severance, relocation, and other expenses through fiscal 2021 related to our corporate realignment and new Atlanta office plans. Of this amount, approximately $4 million to $5 million or $0.09 to $0.12 per share of one-time expense is expected during the fourth quarter of 2020. As Rob discussed, we see these expenses as an investment in both the company's innovation and top-line growth as well as in our efficiencies and commitment to reduce overhead. Third, I'd like to comment on our reporting. As you are probably aware, when the pandemic first triggered shutdowns across North America in March, creating extraordinary conditions for the country and our business, Papa John's began to provide monthly updates on comparable sales in addition to our normal quarterly reporting. We've continued to do so since with the goal of providing investors additional transparency during a period of suddenly higher volatility and uncertainty. Though there remains uncertainty and volatility around the impact of the pandemic going forward, on a relative basis, the sudden increase in uncertainty and volatility that initially led us to institute monthly sales reporting has passed. For that reason, we will return to our quarterly reporting frequency going forward, in line with our industry peers. As always, we will continue to evaluate our reporting procedures and disclosures based on business conditions and disclosure best practices. I'll now turn the call back over to Rob to discuss our outlook. Rob?
Rob Lynch, CEO
Thanks, Ann. Congratulations on your amazing start as our CFO. We're so thankful and happy to have you as part of our team. I'd like to conclude by discussing how Papa John's is positioned for the short and long-term. Papa John's is on a growth trajectory, having now achieved positive North America and international comp sales for 5 and 6 consecutive quarters, respectively. And so far, in 2020, we have delivered record results and outperformed the overall pizza delivery market every quarter this year. As we look to the future, we expect the underlying factors that have contributed to our performance year-to-date to continue to benefit us in the longer term. We have built a scalable, sustainable innovation process that is producing winning new menu items backed by a highly effective marketing model that makes our food the hero and has driven new levels of consumer awareness and favorability. We're just beginning to realize the benefits of these changes. Looking ahead at Q4 and into 2021, we have an exciting pipeline of opportunities lined up across pizza, Papadias, and new platforms, which we look forward to telling you about in the near future. The growth in our business this year has connected millions of new customers with our brand, including over 8 million across our digital channels alone. These new customers are showing great promise with a higher portion purchasing multiple times shortly after their first purchase, a strong indicator of their stickiness. Additionally, Papa John's franchisee investment proposition and development capabilities are more compelling today than ever. We also have more domestic and international development whitespace than other top pizza brands. Together, these factors indicate our great potential for long-term unit growth in addition to continued comp sales growth. So to sum up, at Papa John's, we're working hard to take care of our team members and customers, deliver great pizza, and realize our tremendous potential today and in the future. I'd like to thank our shareholders and everyone on this call for their interest in our company and for their continued support. With that, I'll turn the call over to the operator for Q&A.
Operator, Operator
Our first question comes from Peter Saleh from BTIG.
Peter Saleh, Analyst
And Rob, thanks for making me hungry this morning as well. I just want to ask, I know you guys aren't really providing a ton of detail on a go-forward costs, but any qualitative comments you guys care to make on the momentum in October? And maybe just circling back, I think in the past, you had talked about maybe half of the comp coming from pandemic tailwinds and maybe the other half from some of your initiatives. Do you think that still holds? Or just any more detail around that would be helpful?
Rob Lynch, CEO
Peter, great to hear from you. Yes, we are very excited about the path forward. As we mentioned, we launched Double Cheese Burger Papadias, which is being received extremely well, better than we had even expected. And we've got a whole pipeline of innovation that's ready to roll. And we're kind of back in on our operating model. As you know, we kind of pulled back a little bit at the beginning of the pandemic to make sure we could execute our operations seamlessly in the new operating environment; we were able to accomplish that and support those restaurants with 15% transaction growth. But now we've got that nailed, and we're ready to move forward with our plan that we put back in place back in 2019. So our plan hasn't changed, it's just accelerated. We've got a much stronger foundation on which to build. The pandemic definitely provided a tailwind and supported all the initiatives that we had put in place prior to the pandemic. And so looking forward, as long as we're in this environment, we'll continue to benefit as the industry continues to benefit. But coming out of this situation, we're hoping, like everyone, for this to end as soon as possible. We feel like we've got a great foundation to continue to drive outperformance and higher levels of comp sales growth.
Peter Saleh, Analyst
Great. And then on the unit growth going forward into 2021, I know you guys are probably still working through some of the details, but how should we think about and maybe model company unit growth versus franchise? And maybe if you just look out a couple of years, what is that mix going to look like in terms of company ownership versus franchise? Is the franchise mix going to go up or is it going to stay kind of around the same? Just any details around that would be helpful.
Rob Lynch, CEO
Yes. The disproportionate amount of our development will come from franchisees, no question. We're looking forward to getting back to building restaurants internationally. As we called out in the call, it's been a challenge in a lot of markets as local governments have been challenged to support the construction process and the permitting process. But we look to 2021, and really, as we come out of the pandemic globally to be able to get back and start building a lot of franchisee restaurants internationally. As you know, our international business is 100% franchise. So those will all be franchises. Domestically, we are looking to build some company restaurants next year. That's really a commitment to the kind of operating margins that we're seeing. And we feel that we can benefit from that and deploy some of our cash flow that Ann highlighted back into the organic growth of our business. But even with that, the disproportionate amount of new builds will come from franchisees. So over time, our system will definitely move more towards the franchise ownership versus company ownership despite the fact that we are planning for the first time in a long time to have some company building going on next year.
Operator, Operator
Our next question comes from the line of Alex Slagle from Jefferies.
Alexander Slagle, Analyst
Congratulations on the quarter, Ann, and welcome to the team. I understand you want to keep this discussion at a high level regarding the buyback authorization. Could you share more about your capital allocation priorities for 2021, particularly concerning the reacceleration of company development, changes at headquarters, potential debt paydown, and the buyback? I also noticed that your volumes have increased significantly this year and that you plan to further accelerate growth next year. Could you elaborate on the opportunities regarding processing and distribution centers? It seems there hasn't been much growth in that area in the past, so are there plans for expansion in the next couple of years?
Rob Lynch, CEO
Alex, I'll let Ann discuss some of the specifics. I know she's enthusiastic about the plans we're beginning to develop. Generally, I can say that our business is undergoing a transformation. After 1.5 years of assisting franchisees through challenging times, we are now prepared to reinvest in our business. There are numerous opportunities for this, including new store development, technology investments, and enhancing productivity in our restaurants. Currently, we are exploring a wide range of opportunities to boost and accelerate operating income growth. Despite the abundance of investment opportunities, we expect to maintain a significant amount of cash flow from operations and a healthy cash balance. We are looking for the most efficient and productive ways to utilize that capital while ensuring we provide returns to our shareholders. Now I'll turn it over to Ann to discuss the planning process for the capital allocation strategies we are implementing.
Ann Gugino, CFO
Yes. Good morning, Alex. So I'm so excited about the outlook. We have an incredibly strong balance sheet that provides optionality and security. Rob talked about the business model with the strong fundamental cash flow generation capabilities, and he talked a little bit about not only will the business continue to generate strong cash flows, but the significant cash no longer required for the We Win Together program just leaves Papa John's in an even better position to drive earnings and free cash flow. So clearly, there are opportunities to leverage the balance sheet as well to further create value for shareholders. So it's a bit premature to give specifics beyond that, but know that it's something that we are laser-focused on as a leadership team. So I look forward to coming back with more details in the future.
Alexander Slagle, Analyst
That's great. And just on the margin side, if you could talk about implications of the headquarters changes and reorg on the underlying G&A expense heading into '21, '22, what we should think about there?
Ann Gugino, CFO
Sure. So as we talked about going into '21, we did have some one-time expenses in total of about $15 million to $20 million, and a portion of that we actually expect to hit here in Q4 of 2020. But what I would reiterate, as you think longer term, this investment is one that positions us to accelerate our long-term growth, and we're absolutely committed to doing that without a long-term increase in G&A.
Rob Lynch, CEO
I'll expand on that. This will enhance our efficiency from a general and administrative perspective, which was part of the goal behind the reorganization. While the opening of a new office in Atlanta is attracting significant attention, the focus is on restructuring our organization to enable us to drive shareholder value more productively and efficiently in the future. This is a key reason for these changes, and it's not solely about launching a new location.
Operator, Operator
Our next question comes from the line of Alton Stump from Longbow Research.
Alton Stump, Analyst
Just wanted to ask on the unit growth front, a hard question, obviously, it's a tough environment to get permits and all that due to COVID. But how soon do you think that will kind of ramp up here in the U.S. anyway? Next year, is it first half of story or is it more of a back half '21 story as you sit here today?
Rob Lynch, CEO
Alton, I wish I had a definitive answer for you on that. We absolutely thought that we were going to be back to building restaurants at scale in early 2021. And now everyone's talking about the second wave of corona. And as you know, the U.K. right now is in a shutdown. And if that moves on to other markets, it's going to delay the development process. The flip side of that is it is going to continue to provide additional tailwind for our business above and beyond our organic growth. So we are ready, we are prepared. We have the infrastructure in place. We've already had a lot of the conversations with the franchisees who want to open up these markets that continue to grow these markets. It really is a macroeconomic situation that's impeding the development. So as soon as these governments and these markets are ready, we will be ready to go and build restaurants.
Alton Stump, Analyst
Great. Very helpful. And then just a quick follow-up to a question earlier. Just as a capacity standpoint, obviously the huge growth you see, are there any concerns over the next 12, 18 months of having to build more capacity, particularly here in the U.S.?
Rob Lynch, CEO
It's a great question, and I apologize for not addressing it earlier. Currently, we don't anticipate needing to invest a significant amount of capital in building supply chain capacity. As you may know, in the past couple of years, the brand experienced a slowdown in volumes, resulting in excess capacity. We adjusted our manufacturing schedules and distribution models to effectively manage that excess. This year, as volumes have rebounded, we've returned to a more efficient manufacturing environment with adequate capacity to support substantial growth in the business. Therefore, we do not foresee any major capital expenditures in the supply chain at this time.
Operator, Operator
Our next question comes from the line of Brian Bittner from Oppenheimer & Co.
Brian Bittner, Analyst
Congratulations, Ann. Rob, question for you. Investors, they seem to have anxiety that sales trends have decelerated recently from the third quarter. And we all knew the elevated trends during the pandemic weren't necessarily sustainable. But I guess what this is doing is creating uncertainty regarding 2021 and your ability to hold on to the financial gains from COVID. So do you think that based on all your insights that you are going to be able to hold on to your AUVs in 2021? And what can you say today to help us understand how do you expect to fight this lap and retain the business in 2021?
Rob Lynch, CEO
Great question, Brian. This is likely the most important question for our business right now. Every day we continue to operate during the pandemic, we gain many new customers. The more new customers we acquire, the better our opportunity to serve them, take good care of them, and create future customers. We need to focus on transactions, which are driven by the number of customers and their frequency of visits. As other segments reopen and dining capacity increases, and as people become more comfortable eating out in larger groups, we can reasonably expect an impact on frequency. So, it's crucial for us to generate a sufficient number of new customers to balance any decrease in frequency, along with growth in ticket size. This year, we've added over 8 million new customers, which is significant for our business. Many of these customers are coming through our loyalty programs and tend to visit more frequently and spend more compared to customers before the pandemic. This gives us confidence that they are enjoying their experience and returning, indicating a lasting relationship rather than a one-time visit. We believe the loyalty of these customers will help us maintain our average unit volumes moving forward. Regarding ticket size, we launched Papadias to enhance our lunch offerings, and we've seen positive momentum since February. Even as pandemic conditions limited commuting and dining out, Papadias began to feature in many of our pizza orders, adding significant value for us. Programs like Shaq-a-Roni, although priced at $12, actually yield a higher average ticket price than our usual pizzas. Through innovation, we are increasing our ticket averages without raising prices, and combined with the loyalty of our new customers, we are confident in sustaining these average unit volumes moving forward.
Operator, Operator
Our next question comes from the line of Chris O'Cull from Stifel.
Christopher O'Cull, Analyst
Welcome, Ann. Rob, as a follow-up to that previous question, I'm curious about your thoughts on the main reasons for the slowdown in growth over the last few periods.
Rob Lynch, CEO
I think that in the industry, in general, people have gotten a little bit more comfortable leaving the ops. And we all anticipated that, right? We've all expected that to happen. I mean the rate of growth that we were delivering our company, 28% in Q2 and now 24% in Q3, I mean it would be crazy for me to tell you that, that's going to continue on in perpetuity, it's just not. I mean, so there is, at some point, going to be a deceleration in this business. And so the question becomes, 'Well, how much of it can we hold on to? And how much of it is foundational that we can then build on top of?' And so we have been focused not on any deceleration. In fact, we're very happy, very pleased with the continued growth of our business. But we have been focused on the foundation. We've been focused on the investments we're making and the quality of our core products. We've been focused on the investments we're making and the innovation that's going to continue to bring in new customers and continue to drive frequency. And we've been focused on getting more productive, both corporately with our G&A as well as at the restaurant level through some of the investments we've made in our infrastructure, both technology as well as process and equipment, to make sure that our operators are making great profits that they can reinvest back into development. So we are not concerned about the industry's deceleration.
Christopher O'Cull, Analyst
Okay. That's helpful. And then what do you think is necessary to attract new, large, well-capitalized franchise groups to the domestic system?
Rob Lynch, CEO
It's all about the profitability of the restaurants, which is why we have been focused on that. Our restaurant margins have significantly increased over the last year. This improvement allows us to engage with investors and potential franchisees who have various options for their capital and demonstrate that we're a strong investment opportunity. Our return on investment and paybacks are among the best in the industry. We have more development potential compared to most of our main competitors who operate many more restaurants. For those with capital who want to make a sizable investment, such as operating 100 restaurants, we offer greater opportunities for them to enter our system and achieve that scale.
Operator, Operator
Our next question comes from the line of Eric Gonzalez from KeyBanc Capital Market.
Eric Gonzalez, Analyst
The recent development deal in the mid-Atlantic, it seems like it was a step in the right direction in terms of unit growth. To what extent should we expect to see more of those types of deals in the months and years ahead? And one thing I was wondering as it relates to that deal and possibly others is what types of franchisee incentives have you put in place to get those types of deals done, whether it be co-investment, royalty relief, marketing fund relief, etc.?
Rob Lynch, CEO
Eric, we’ve actually gone the opposite direction. We’ve scaled back the incentives. Two to three years ago, when the business was really challenged and still trying to drive store growth, there were some very robust incentives. Now the incentive is that you can make a significant amount of money owning Papa John’s. We’ve restructured our incentives to reflect the reality that we don’t need to give the stores away, and we aren’t. The excitement around development is significant, both internally and externally. As we mentioned, HB Restaurant Group, a current franchisee, is eager for a larger share of the business. A lot of our current discussions are with potential franchisees who want to enter the market and have some scale right from the start, and we have 600 company-owned restaurants that provide that opportunity for the right partner. We are actively engaged in discussions with external partners interested in acquiring multiple restaurants and expanding from there. We expect this to be our growth model domestically. On the international front, there's a lot of potential. We operate in 47 countries, while our competitors are in twice that number. There’s still much opportunity to develop. We have only 200 restaurants in China, which is less than 20% of some of our larger competitors. We believe we are poised for significant development. We’ve recently rebuilt our development organization to support this level of growth, and we are focusing on this as we emerge from the pandemic.
Operator, Operator
Our next question comes from the line of Dennis Geiger from UBS.
Dennis Geiger, Analyst
Great. Rob, thanks for all the detail on the sales drivers. Just wondering maybe if you could help us frame up what the most impactful are looking into next year as you lose maybe some of the mobility tailwinds from this year? I'm sure it's a combination of everything. But given you've got, I would say, a lot more sales drivers than most, wondering if you could just kind of frame up what you view as the most impactful for next year?
Rob Lynch, CEO
Yes. I want to emphasize that our Papadias platform serves as both a transaction driver and a check driver. We have a range of innovations planned for this platform that we believe will sustain its growth, even as we begin to cycle it starting in February. We have plenty of strong ideas that will continue to enhance growth and contribute to increased checks. Additionally, we are focusing on our core business, specifically the AO pizza brand, which has a lot of innovation potential that we previously chose not to pursue for many years. We believe these innovations could also help drive checks as customers opt for unique crust toppings and other additions, such as Garlic Parmesan. Another important aspect is our partnerships with aggregators, which are experiencing rapid growth. We have increased our sales through aggregators from 2% to 6% in just the last six months. This has proven to be a significant and profitable addition to our business. We are actively working to expand both our distribution and the number of stores partnering with aggregators, while also improving the profitability of these transactions by managing fees and overhead costs. Lastly, I want to highlight our media marketing efficiency. We have become much more effective with our media investments compared to the past. The sales growth we are reporting, such as 28% in Q2 and 24% in Q3, is supporting our media efforts. Our media spending is increasing, and the efficiency and productivity of those investments are also significantly improving, positioning us to achieve faster top-line sales growth from our media dollars.
Dennis Geiger, Analyst
Great. And then just wondering quickly if you could talk at all about any impact that you've seen in certain regions or countries that have seen a more notable COVID spike impact in recent months or weeks?
Rob Lynch, CEO
Yes, New York remains one of our top markets. It faced challenges initially, but it has evolved significantly over the past nine months. We are experiencing notable growth there. California, which has been challenging for us for a long time, is performing exceptionally well this year as conditions change. Internationally, China, after being closed for a substantial period, has reopened, and we are now reporting double-digit sales increases there. The recovery has been robust since the reopening. Korea continues to be a strong market for us. In Chile, one of our largest and most profitable international markets, we are seeing solid performance as it has fully reopened. Meanwhile, the U.K. has proven to be the standout region for us this year. The team there has done outstanding work, not only achieving sales growth but also gaining market share. The business is thriving. They just entered a lockdown, and we expect continued growth in that market as a result.
Operator, Operator
So our next question comes from the line of Lauren Silberman from Crédit Suisse.
Lauren Silberman, Analyst
Ann, congratulations on the role. So just to start with the international unit growth pipeline, you have nearly 2,100 international units currently. I recognize there's wide variability across the market, but the average AUVs are about 50% to 55% of what you see in North America. So can you give any color on where you've signed development agreements in international markets and examples of where you see the most meaningful opportunities? And then any color on how you're thinking about the composition of North America versus international on the unit growth going forward?
Rob Lynch, CEO
Sure, Lauren. Yes, as I mentioned, China presents a significant opportunity for us. We have strong average unit volumes in that market, and even with just 200 restaurants, we see substantial potential for growth. The Middle East has also performed very well for us, despite being a challenging market during COVID, with multiple shutdowns. We have restructured some of our franchisees in that region, which positions us to grow more effectively moving forward. Russia remains a stable market for us as well, although it has not experienced the same growth as many other regions due to the pandemic. We believe there is considerable upside potential as we emerge from these circumstances. Lastly, South America is noteworthy, particularly Brazil, which still holds vast opportunities for us. We perform well in the region, with Chile and Peru being strong markets as well. Although Peru has faced complete shutdowns, both Peru and Chile show great promise for us, and Brazil is poised for success. With nearly all our international operations being franchise-based, we are actively engaging in discussions to onboard new franchisees and expand our restaurant presence. Coupled with the 20% comp sales growth that we expect to maintain or even accelerate, our international business will become a much larger portion of our overall strategy.
Operator, Operator
And our last question comes from the line of Brett Levy from MKM Partners.
Brett Levy, Analyst
Following up on the previous topics, considering the challenging comparisons you face, how are you planning to invest structurally in the business? How will you manage costs? What type of operational and strategic support will you implement for the franchise system?
Rob Lynch, CEO
That's a great question. We had initiated some of these projects prior to the pandemic, working with aggregators and integrating them into our systems. These aggregators help expand our capacity. Our biggest challenge is drivers, and bringing in more drivers through models like DoorDash significantly aids us, not just in labor management but also enhances our throughput, as drivers can pick up deliveries. Additionally, we've made infrastructure investments. A few quarters ago, we invested in a new call center platform, called Papa Call, which removes the need for our stores to handle phone calls. This is particularly valuable during busy times like Friday and Saturday nights, when high volumes can be distracting. By eliminating the need for someone to answer the phone, we can redeploy that labor to increase throughput on our make line, where we prepare pizzas, or bring in another driver. This type of investment has yielded significant benefits across our company restaurants and is rapidly being adopted by our franchise restaurants. Another major investment is in dough spinners, which save about 40 seconds during pizza preparation by pre-flattening the dough. This allows for quicker swapping without compromising quality. All of these investments are aimed at boosting productivity and throughput in our restaurants, and we expect to see gains in restaurant margins as early as next year. More updates will follow.
Operator, Operator
Thank you. That concludes our Q&A session. At this time, I'd like to turn the call back over to Mr. Rob Lynch, President and CEO, for closing remarks.
Rob Lynch, CEO
Thank you for your great questions. I always appreciate the opportunity to share our story with you and discuss how enthusiastic we are about the business. Thank you all for joining us today. I hope you share our excitement about the direction of our company. I understand there are many questions about the pandemic and its ongoing effects on our business. I want to emphasize that we were already building momentum in the first quarter before the pandemic struck, with an increase of over 7%. This was the initial phase of realizing the benefits of our strategic priorities, and the pandemic has simply accelerated those initiatives. We are now more advanced and better prepared than we anticipated as we move into 2021, having established a solid foundation that will continue to drive our business. Our successful strategy and momentum are set to persist in the near future, and this foundation will yield long-term results. We look forward to sharing those outcomes and celebrating the successes we are achieving. I wish you and your families good health and safety. Thank you once again for being with us today.
Operator, Operator
Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.