Papa John's Q1'16 Earnings Conference Call: Full Transcript

Operator:

Good day, ladies and gentlemen, and welcome to the Papa John’s First Quarter 2016 Conference Call and Webcast. At this time, all participants are in a listen-only mode. Later, there will be a question-and-answer session, and instructions will follow at that time. If you require any assistance during the call you may press star then zero on your touch tone telephone. As a reminder today’s call being recorded.

I would now like to turn the call over to Lance Tucker, Chief Financial Officer. Sir, you may begin.

 

Lance F. Tucker:Senior Vice President, Chief Financial Officer, Chief Administrative Officer and Treasurer:

Thank you, Shannon, good morning. Joining me on the call today are our Founder, Chairman and CEO, John Schnatter, and our President and COO, Steve Ritchie; as well as other members of our senior management team. After the financial update, John and Steve will have comments about our business and the management team will then be available for Q&A.

Our discussion today will contain forward-looking statements that involve risks related to future events. Actual events may differ materially from the projections discussed today. All forward-looking statements should be considered in conjunction with the cautionary statements in our earnings press release, and to the risk factors included in our SEC filings. And all statements made on this call are as of today.

Please refer to our earnings press release and the Investor Relations section of our website for reconciliation and other disclosures related to our discussion of non-GAAP financial measures on this call. Unless otherwise noted, all comparisons are versus the comparable periods from a year ago. This call is being taped, and a replay will be available for a limited time on our website and in downloadable podcast format.

Now, onto a discussion of our first quarter operating results: EPS in the first quarter was $0.69, up 25% over 2015. These results were driven primarily by global comp sales and the impact of share repurchases. As expected first quarter revenues were down slightly versus the prior year, as higher revenues from restaurants sales increases and unit openings were offset by lower focus equipment sales and lower commodity prices which reduced PJ Food service revenues. As a reminder neither of these items significantly impact possibility.

We opened 10 net global units in the first quarter aid on the international side into North America as typically the case most of our will net unit openings will occur in the back half of the year. On the business segment basis, operating income for domestic company owned restaurants increased $1.7 million due mainly to 1% comparable sales increases and lower commodity costs.

Operating income for the North America franchising segment was up $1.3 million due primarily to increased units and lower royalty incentives. Operating income for our domestic commentary segment decreased by approximately $250,000 due to lower margins. We expect full year margins to be in line with the prior year.

First quarter operating results for our international segment increased approximately $1.7 million due primarily to 5.7% comps and increased unit. Foreign currency exchange rate negatively impacted our operating results by approximately $700,000. Our unallocated corporate expenses decreased $900,000 due primarily to lower legal costs and lower expenses for annual operators conference which was held in the second quarter of this year. The shift in conference timing will impact the second quarter by around penny to a penny and half.

Our effective tax rate was 32.3%, down 1.2% from the first quarter of 2015. Our effective income tax rate may fluctuate from quarter to quarter for various reasons including the timing of deductions and credit. We repurchased $66 million of stock during the quarter and currently have over $125 million of remaining share repurchase authorization.

Our free cash flow, a non-GAAP measure we defined as cash flow from operations, less capital expenditures was approximately $20 million, down versus 2015 due to unfavorable working capital changes most notably the payment of our previously disclosed legal sediment of $12 million. Our net debt position, defined as total debt less cash and cash equivalent was approximately $300 million at the end of the first quarter.

Moving on to the remainder of 2016 as noted in our press release we are reaffirming all previously issued 2016 guidance.

And now I’d like to turn the call over to our Founder Chairman and CEO John Schnatter.

 

John H. Schnatter:Founder, Chairman and Chief Executive Officer:

Hey thanks Lance and good morning everyone. Thanks for joining us on the call today. We discuss our first quarter 2016 results.

Overall, I am pleased with our Q1 results with especially our strong EPS growth and continued progress in the International business. However as expected our domestic comp sales were a little lighter than usual. As you can and for a given our reaffirmed guidance that 2% to 4% annual comp sales. We expect the rest of 2016 to be stronger as we continue to drive sales via quality message technology platforms and support partnership.

A few highlights from the quarter includes the following. EPS in the first quarter was $0.69 up 25% over 2015. These results were driven primarily by domestic and International comp sales and unit growth and favorable commodity trend, as Einstein said compound interest is the eighth wonderful world. Over the past five years, Papa John’s has grown EPS nearly 20% per year.

In terms of the international growth, in the first quarter we announced the signing of the workshop development agreement in Spain and the Netherlands. Going in Western Europe is a big part of our experience and strategy and we are very excited to add these two new countries to our current base of global 4,900 restaurants in 40 countries and territories.

With regard to the sports partnerships, we continue to up our game among sports fans. Just prior to opening day, we announced a partnership with Major League Baseball. This partnership combines two of the nation’s favorite pastime, eating Papa John’s pizza and watching professional baseball. As official pizza for Major League Baseball, we are delivering a better pizza to baseball fans and making grand slams even more exciting with the Papa slam. We already have 21 clubs sponsorships so this national deal will enable us to reach new audience through NBL Digital and social channels as well as signature events and our own share of stomachs with baseball fans.

Now on our last earnings call I mentioned the importance of our clean label initiative and our commitment to better ingredients. We continue to deliver on our promises and announced last Thursday that we will removed high fructose corn served from our entire food menu, the first national pizza chain to do so. This change has been fully implemented and includes all pizza ingredients, pizza toppings, dessert items and salt selections. We have always drived for high quality ingredients in our pizzas and continue our aggressive push for cleaner ingredients menu offerings.

We work tirelessly to set the industry’s gold standard for pizza ingredient quality and this is the next step in fulfilling our promise to deliver on better ingredients. But we won’t stop there. By the summer of 2016 our grilled chicken pizza toppings and chicken poppers will consist of poultry that is raised without human and animal antibiotics and is fed a 100% vegetarian diet. With regard to technology, we are always striving to provide and improve the digital customer experience and create utility to make the ordering experience simpler.

We’re pleased to announce that about 55% of our total sales now come through digital channels. Further we continue to grow quickly in the mobile channel with over 60% of sales of the digital transaction is coming via mobile devices. To wrap up I’m excited to kick off the year strong and create that momentum in Q2.

With that I’ll turn it over to Steve Ritchie. Steve?

 

Steve M. Ritchie:President and Chief Operating Officer:

Alright. Thank you, John and Good morning everyone. I’d like to start by thanking our franchisees and operators around the world for delivering another solid quarter.

As John stated the domestic comp sales were little lighter in the first quarter. We picked up strong traffic momentum towards the end of the quarter and therefore reaffirmed our 3% to 4% full year comp guidance. Q1 marks at 22nd consecutive quarter a positive comp sales producing a strong three year comp of over 16%.

Within the category, favorable commodities have continue to produce strong unit economics would have also contributed to more price focused promotional activity. We were pleased with the launch of our quality guarantee underscoring the commitment to our brand promise as the quality --. Their value equation of Papa John’s goes way beyond the price you pay and we are confident that our brand positioning and balanced promotional activity will continue to produce strong results year-after-year our monitor is better ingredient, better pieces and that now expands to our focus on delivering even better experiences to our customers and our team members. We know our customer experiences will never exceed our team member experiences.

So we have recently launched a cultural leadership program to inspire our teams to leave the head coach model each and every day and we believe that will be driving force towards our vision of becoming one of the world’s most admired brands. To demonstrate our discussion up for our customers. We also recently launched a customer efficacy program that will provide us enhanced real time clarity under the feedback from all our customers.

On the international front, Q1 comps were a strong 5.7% representing our 25th consecutive quarter of positive comp sales.
We continue to see robust sales growth in United Kingdom, Latin America, the Middle East and across Europe. In short, the overall portfolio was strong with good results across most of our markets. In Beijing, we continue to progress well with re-franchising efforts showing interest from several highly qualified parties. We still anticipate having these transaction concluded before the end of the year.

On the development front, we opened 10 net global units in the first quarter and reaffirmed our full year guidance of 180 to 210 with now at over 1300 units in the global development pipeline. As John stated, we have several new agreements in Western Europe and are very excited to announce that 2016 will be a record year for total new country openings providing us with a broader geographic portfolio to drives country growth. Later this year, we will hit a growth milestone of 5000 stores around the world.

Turning to technology, we are very pleased to have domestically reach an industry leading 55% online sales mix are now 60% of online sales coming from our mobile channels. We will continue to make investments that strengthen our digital platform and will be introducing innovation and foundational enhancements to our digital business throughout 2016. The technology advantage for Papa John’s will only get better for years to come.

In closing, all the key elements of our global brand strategy are going in the right direction. Our culture is stronger than ever, our session for the customer has now wavered, our commitment to the high quality ingredients acceptance to -- and the passion and pride of our team members is still our key ingredients to long term success.

With that I will turn it back over to Lance for questions.

 

Lance F. Tucker:Senior Vice President, Chief Financial Officer, chief Administrative Officer and Treasurer:

We are ready to questions.

 

Question & Answer

 

 

Operator:

Thank you. Our first question is from Alton Stump with Longbow Research. You may begin.

 

Alton Stump:Longbow Research:

Hey thank you and good morning guys. A couple of questions, first off in the press release you mentioned that you guys bought 20 franchise stores also I would say you stepped up your buybacks significantly. Is that a sign of things to come on either front or was just work opportunistic in your view?

 

Steve M. Ritchie:

I’ll start with that I’d would say, I’ll take them separately. We were certainly optimistic, opportunistic there on both fronts. We’ll continue to look at units in our corporate versus franchise portfolio mix and make a case by case determination and if we want to be a buyer or a seller, so we will continue to look at those and on share repurchases obviously we feel like we have an attractive valuation and ramped our repurchases a little bit in the first quarter as you saw.

 

John H. Schnatter:

This is a John. The stock went some 79 to 49 and grew EPS 20% and comps were 4% so we felt really good about buying $60 million worth of stock. If you know the $50 give or take range.

 

Alton Stump:

Got it. Makes sense and then on international segments, I was surprised how much profit we saw even with the currency drag year-over-year in the quarter. Is there anything other than China exit that explains as to why traffic was so strong internationally this quarter?

 

John H. Schnatter:

I’ll now take a account from a macro position and then I’ll let Steve fill in the gaps. . With the exception of Asian specific region our international business is on fire and we just continue to get better and I think this is our future management is more focused on international than other.

 

Steve M. Ritchie:

Yes John. Alton it’s Steve. I would just reiterate some of the comments in my prepared remarks.

The success that we have seen in the United Kingdom has been frankly very exciting to see approaching 400 stores there. Russia, despite obviously some macroeconomic challenges that market has been tremendous for us outpacing some of the expectations that we had last year leading into this year. Latin America continues to be a market that has performed quite well and the Middle East as we talk about the Middle East being certainly a lot of turmoil from the political standpoint in geographic issues throughout region, our business has performed quite well. The Asia region is probably an area where we’ve got the most challenge but opportunistically looking at the improvements we need to make in that region of the world and feel confident about the overall strategy.

 

John H. Schnatter:

And Alton this is John again. We’re more in the people business and the Pizza business it’s all about the people. Just done a tremendous job oversea and international Europe and the UK it’s just based fantastic and is doing quite well than in Latin America so I think a lot of it has to do we just have great leadership.

 

Alton Stump:

That’s great. Thanks for the color. And then some more now you had that guide in the Q1 here. It occurs to see you guys hold a 2% to 4% North America comp growth guidance. First quarter was lower than that comparisons coming up particularly in the back half. Is there anything outside of comparisons coming up that gives you confidence that you can stay against the midpoint of the 2% to 4% range for the full year.

 

John H. Schnatter:

I will take that one and then Steve you can know we always try to under promise and over deliver. So if we are giving you a number a two to four we’re feeling good about that number. First quarter usually when it’s snows it’s good for us and that when you 7 piece in one day to like -- North East where we had and said about the stores one of our larger competitors came out of -- is in Q2. We always feel that a little bit 3, 4, 5 weeks and then we had a bad Easter in Q3. So we had a few things of were kind of hard and I think the competitive environment they stepped it up a little bit.

 

Steve M. Ritchie:

John, its Steve and I just a couple of things add. So I’d say trailer two quarters, so it started off the quarter relatively like some of that some of the point that John have made not significantly immaterial in terms the weather, but certainly a factor (inaudible) activity as we led into the start of the quarter was pretty aggressive our promotional strategy led in to more of a branding effort which we were pleased with. Certainly we are going to balanced our brands with our promotional activity.

We did make some adjustments towards the tail end of the quarter and that momentum as we finished the quarter was led into the second quarter that’s what drives the optimism on the full year 2% to 4% guidance given the momentum on the full year piece.

 

Alton Stump:

Got it. Very helpful. Thanks guys.

 

Operator:

Thank you. Our next question comes from Alex Slagle with Jefferies. You may begin.

 

Alexander Russell Slagle:Jefferies LL

Well thanks. Congrats guys. Just want to follow up on that last question. Just exactly what the changes you made were and what drove the momentum towards the end of the quarter and just kind of given the competitive environment your plans that stay relevant in top of mind with so much value and noise in the category right now?

 

Steve M. Ritchie:

Hey, Alex its Steve. So I’ll give you a couple little bit more color around that. So when we launch the quality guarantee strategically clearly we had a plan in mind.

We wanted to talk about our clean label work that we have been doing for the last three to five years. Clearly it was a -- spot I think just in terms of timing and promotional environment how it could bit better timing just in terms of traffic mover, but we did accomplished what we said out to accomplished to educate the consumer why is Papa John’s is different, why are we to recognize quality leader within the category. But we did move to slightly more retail driven promotion we did have our 999 offered large up to -- promotion that was even in the branding spot, but we move to a more retail driven focus with some of our media from 30s to 15s and that drove significant traffic as it certainly a good value offer for Papa John’s.

It’s not John’s point the $5 pricing that we have seen from some of our competitors. That we saw strong traffic momentum towards tail end of the quarter. That promotion do a quite well while we wrap the quarter with that as you can see in today’s environment we have broaden the mediums promotions of two medium to toppings for 699 which is more premium competitor with some of our competitors have done, but we have tested the medium offer for years in the local markets and it’s also performing well.

 

John H. Schnatter:

Alex, this is John. Not to get -- Steven have been doing this combined for over 65 years. I have -- 8 of 93 we want public and pizza was doing a big food pizza.

So we have pretty well seems just about everything that you can imagine and we have -- about everything you could imagine. So when the thing Bob’s and we have little bit we wake up and do this every day and that’s our job and that’s why we do and so from time to time they’re going to give question is when they go from -- because they will so they have to and I am sure we filled out a little bit so again as -- three or four or five weeks, we get our back on our game plan.

 

Alexander Russell Slagle:

Appreciate the color and one question on G&A just sort of I guess you gave some color about what to expect in 2Q and the cadence for the year obviously be based on same store sales and related store level bonuses but is there more lumpiness ahead we should think about aside from the conference?

 

Steve M. Ritchie:

Not a tremendous amount of lumpiness Alex but I’ll hit it a little bit. So as I noted in my opening remarks, the conference is a penny to a penny and a half so not a huge number and then as you look forward kind of at cadence what that look like, I’d say overall G&A will probably be a little bit higher in the second quarter due to the event due to the conference as well as some investments we’re making in our technology team and then you should see it kind of come back in the second half of the year to more normalized levels and as we’ve said we expect overall G&A as a percentage of sales to be about same as last year. So spiked up a little bit in the second quarter, come back down second half be about even for the year directionally.

 

Alexander Russell Slagle:

Thank you.

 

Operator:

Thank you. Our next question comes from David Carlson with KeyBanc. You may begin

 

David Carlson: KeyBanc:

Good morning. I had several questions. John or Lance, you just generated 25% EPS growth on a flat domestic comp. Guidance I think including that penny to penny and a half that you mentioned would imply EPS growth of I think 6% to 12% the remainder of the year under the assumption that comps accelerated roughly 3% to 5% the balance of the year.

Can you help us understand why earnings growth would be so much less throughout the remainder of the year given the assumption comps accelerate back to the low to mid single-digits?

 

Lance F. Tucker:

Dave this is Lance. I’ll start and then I’ll let John or Steve jump in if they’d like. Certainly we do expect how our comps sales going forward as you’ve heard but with that said, we do have the few headwinds.

You are going to continue to see FX raise, you are going to continue to see additional investments in our -- and international infrastructure which are really the two major drivers that you’ve seen and then frankly we think it’s a little bit early in the year we’d rather get a little further under our belt before we address earnings guidance changes. So I think those are the main reasons.

 

Steve M. Ritchie:

David its Steve I just had a couple of things. I think the key point is it’s sort of like Lance had alluded to. I think if you look at our 2% to 4% guidance, obviously that aligns with what we’ve got posted on our earnings guidance of 230 to 240.

If you look at our stacks it’s not hard to look at the fact that we’re 66 in Q1, five Q2 goes to 31 in Q3 and then a 2 in Q4. If we can produce the stacks that I think we are confident we can obviously those things could potentially have a potential upside but at this stage in the game I think that’s why we look at the guidance that we have put forth.

 

John H. Schnatter:

And David this is John. The thing that we really focus on is the restaurant profitability and we’ve and his team, Simon, we have tripled our restaurant profitability over the last four years and we are having the best year we’ve ever had in 2016. So if you are driving restaurant profitability that’s where your income’s coming from. That’s just a healthy situation.

 

David Carlson:

Okay. You guys called out minimum wages as having impacted the need now other operating expense line of the company on a store level. How much wage inflation are you seeing and I have a follow up to that.

 

Lance F. Tucker:

I’ll start and then you guys can jump in. So we have seen a little bit of wage inflation overall if you kind of look at that other restaurant operating line in the neighborhood of half of that was wages and half of that was continued in turns pressures that we spoken about for. So I am not going to go into exactly what we’re seeing from minimum wage and what we are not but the other thing I will say is where in some of our corporate markets which is close to our P&L are not in some of those New York California where you see the real minimum wage but there is special throughout the rest of country and various norms.

 

Steve Ritchie:

Yes David its Steve the only thing I would add the way we look at is try to balances things. So we look at as John alluded to before profit after FLM so in Q1 obviously commodities were down sales were down little bit but still we are very competitive on the bottom line.

Our strategy is to drive the top line sales leverage what’s happened in and what’s in the environment we know wages will move frankly we wanted to be able to continue to give our team members raises because the performance driven that us to look at it from that strategic rational. But I think that you look at us continue to drive top line sales at be able to mitigate that the key point is again the significant movement in overall in overall wages are in states but we don’t currently have corporate restaurants.

 

David Carlson:

Sure and if the if the proposal return will goes into effect what do you estimate the impact would be on your cost structure.

 

John H. Schnatter:

Well David this is John. The $50,000 number as that I -- to we have to go backwards to make our vendors -- 50,000 so we already cover their drivers made more than the $15 an hour and that lead you really the people in the store that are ---- and doing the phone and the more you drive you’re IS platform to less of those of you need. So I think we are in the perfect position to handle any kind of wage increase.

The thing that we do look out which -- quiet a bit is cheese and fuel as long as we have got some cheese fuel hedged that’s pretty hard to miss the number everything else kind of falls in place.

 

David Carlson:

Fair enough and if I could just squeeze one more on development. On the last call you guys said you’re expected to get actually all of the 180 to 210 net openings from the last quarters in the year. But today it seems like it might be hold a different you said the both of the openings in the second half. Did you guys have any openings it’s looked from the first half of this year and the second half.

 

John H. Schnatter:

We are not getting specific David. We are actually ahead on development in the first quarter and through period actually ahead of our budget and our forecast.

 

David Carlson:

Thanks.

 

Operator:

Thank you. Once again ladies and gentlemen if you wish to ask a question at this time please press star then one on your touch tone telephone. Our next question comes from Peter Saleh with BTIG. You may begin.

 

Peter Saleh: BTIG:

Great thanks. ----- the year the same-store sales momentum picked up in the quarter continued into 2Q. I was just hoping you guys could give us maybe a little bit more detail on what you think maybe the weather impact was and the e-store any comments little bit on e-store maybe what how e-store maybe impacted the second quarter and is impact in the first quarter is affecting the second quarter today.

 

John H. Schnatter:

Yes Peter we never use weather as an excuse but I don’t want to be specific here because I will said lands but P1 was ahead of a nice start and weather did impact P1 ----- you want to jump have a Steve.

 

Steve M. Ritchie:

Yes I mean clearly the very last week of the quarter. You thinks Peter as I said before they are significantly material because typically weather shakes stuff out on a year-to-year basis from a quarter-to-quarter those things and that becoming the fact factors but not material factors and it was just kind of why we don’t ever call out a specific number to it. I think the key point again is that the significant traffic momentum that picked up towards the tail end of the quarter offsetting really some of those other factors as it relates to weather and wobbles from a calendar standpoint.

 

Peter Saleh:

Got it and then on the advertising side, I know you guys said you made some changes in terms of the cadence for the amount of advertising we are doing, how should we be thinking about maybe 2Q and the rest of the year in terms of your advertising strategy versus the first quarter?

 

John H. Schnatter:

Well Pete, I’ll kind of give you how we operate our marketing. We move extremely quick. We did the ML we took that from in less than three weeks with the commercial.

So not only are we flexible but if we need to make a change, this doesn’t take long to put me in a studio and get the creative done and get it out in the market. Steve you want to hit the different...

 

Steve Ritchie:

Yes sure. Peter I think that some of the learnings that we were equipped with parts tail end of the quarter are some of the strategy we will be using moving forward just in terms of how we look at our retail promotional environment, how we look at LTOs the rest of this year, how we leverage the sports partnerships to the rest of 2016, clearly there has been some learnings over last several years and specifically as the commodity environment remains very favorable, we will be leveraging our promotional strategy to align with that to also align with what’s happening within the competitive environment set i.e. Why we reaffirm that guidance.

 

John H. Schnatter:

Peter let me give you the this is John give you the mindset that we have you all see the comp number once a quarter. We see that number everyday number turns negative, the place doesn’t feel near as good as when the number is positive. So we’re on this everyday and so we do have a negative day, we work on this what happened, how do we fix this.

 

Peter Saleh:

Great, and last may be can you talk a little bit about the commodity environment what you guys are seeing and how much is locked or what do you expect for the balance of this year on your commodity basket.

 

Lance F. Tucker:

Yes I’ll hit that at a high level. So on cheese it looks pretty similar from what we have locked stand point to what it hasn’t. In prior years cheese in obviously trading down a good bit and I guess the thing I’d remind you on cheese is the goal of our program is really to eliminate or reduce any volatility so you’re not going to see the full impact of the drop in cheese prices. You will see some impact. Overall we’re expecting commodities to be somewhat favorable probably 25 to 75 basis points we’ll have to shake -- shake out the rest of the year and that has a percentage of restaurant sales.

 

John H. Schnatter:

Yes Peter, this is John. The cheese, I think it’s 135 right now. The thing about cheese is, is it capable going from 135 to $3 and we just believe we just can’t miss our number on a quarter basis.

Not that we are facing the number unless something that comes way out of the box that we can influence. So what we are trying to guard against is any kind of really down side in case cheese does do something crazy. So let’s say we’re hedging cheese right now at $1.65 to $1.70, and we’ve got half or 60% hedged and the cheese goes about 35, we’re fine with that. It’s not a problem.

What we don’t want to do is we sit in there few dollars a pound and not have it hedged.

 

Peter Saleh:

Great. And then just from a discounting standpoint in the industry how is the discounting subsided at all from either the smaller players and or the larger players is it rationalize at all or you guys seen any evidence of that.

 

John H. Schnatter:

Yes. It’s remain extremely aggressive this year and again that always the lines where the commodity environment is cheese prices been as low as they are. That’s going to be more favorable, that’s going to drive in more competitive environment.

As we’ve said in the past in more competitive price environment the national players are going to be more significantly discounted and they are going to be taking share from the independence in the regional. So it seems to all come back consolidated share within the category the big players win leveraging the strengths of the economy as scale and the strength of technology. So watch out well for us in a long-term. That’s why we are well on our way to a 13th consecutive year of positive comp sales it’s all about consistency in the long-term for Papa John’s.

 

Peter Saleh:

Great. That’s all I got. Thank you very much.

 

Operator:

Thank you. Our next question is from Mark Smith with Feltl and Company. You may begin.

 

Mark Smith:Feltl and Company:

Good morning guys. First I my view is maybe a little different on international. It looks like your margins would down a fair amount especially as we look at restaurant comps there and other adding that FX impact. Can you walk us through really what happened there as far as profitability and why we saw that down.

 

Lance F. Tucker:

Hey, Mark this is Lance. We had a couple of things that was bringing that margin down a little bit want again foreign currency hit about $700,000 impact. The anything as we did we do now so certain -- driven income from the UK we show it -- when we did show it ‘s essentially a zero margin business so it drove that margin down that’s a couple percent and we look that way the rest of the year so which you are aware.

So really on a go forward basis its’ really kind of a percent you were looking at in the first quarter and that was really driven somewhat by the foreign currency and may be little bit due to China we continue to have weakness in the China market and as Steve and John both referenced from moving forward there with re-franchise plan.

 

Steve M. Ritchie:

Yes. Mark I would just say it’s Steve on the international market is going to be volatility. You certainly can’t take percentages to the bank.

We want to grow this business dollar-after-dollar, year-after-year after year and we’ve demonstrated that since 2012 the international business is certainly been moving in the right direction. Jack -- he is provided an infrastructure for growth and we are so excited about 2016 being a record year for total new country openings. New country openings or low single-digit in year one but that provides us with the platform to really drive that dollar growth up in the right direction. Percentages are always going to move around and in an international business.

 

Mark Smith:

Okay. And then can you guys just us walk us through kind of what the international numbers look like post this business in China how much promissory business that there is still going to be there or do you get -- all of that may be just walk us through the -- of that business post selling.

 

Lance F. Tucker:

Sure I will just do with the high level Mark and getting the larger numbers but which will have remaining you will have zero corporate stores on the international side and then you’ll have two QCCs one in the UK, one in Mexico. The one Mexico is really very, very small so really what’s you are talking about as far as owned assets from the company’s books will be commentary in the United Kingdom which is the pretty significant contributor. As all you’ll be looking at post sales and then last question for me.

Could you guys walk through the impact of sports sponsorships either it’s in one market or as you go in like you major League baseball sponsorship and we see a gross profit margin down a little bit as you maybe a more promotional around that in a market and you make up $14 of volume or we look into that ----

 

John H. Schnatter:

Alright again the percentages game we’re careful with. So we try to drive the top line side of the business the sports partnerships that we have whether it’s the major baseball league sponsorship the NFL league sponsorship are the over 150 sponsorships that we have from ---- to professional all of those we’re design to drive brand awareness the activation drive sales and ultimately they drive more profit after our food labor and mileage numbers. So yes some of those promotions are quite aggressive in fact some of them are 50% of after a game they win or number of points for goals they scored but ultimate we know we’re bringing in new customers we’re building the brand awareness and looking to growing the overall brand

 

Mark Smith:

Great. Thank you

 

Operator:

Thank you Our next question is the follow up from David Carlson with KeyBanc. You may begin

 

David Carlson: KeyBanc:

Yes, just a couple of quick ones. Did Steve you said in your prepared remarks that 60% of sales 6 to 0 are from digital platform.

 

Steve M. Ritchie:

David it’s Steve. 55% are total digital online sales 60% of that is coming now from mobile channels we have previously announced that was 50% so it’s now up to 60%

 

David Carlson:

What’s driven the increase recently is it awareness or just elaborate on that

 

Steve M. Ritchie:

The overall 55% or the 60%.

 

David Carlson:

Either one.

 

Steve M. Ritchie:

Yes thank you the promotional activity is certainly one of them clearly a lot of our promotional stages is driven to drive conversion from offline to online some of that just organic consumer behavior consumers are moving more to technology and in lot of its just the enhancement that we’ve made to the foundation of our platforms. We believe that the customer experience in our digital channels is improved so that’s driving a retention and frequency levels to drive the overall mix up.

The mobile side is obviously been the most accelerated drive of growth within the digital platform and don’t suspect that’s going to slow down any time in the near future.

 

David Carlson:

That’s fair and then just one follow up just the guidance that you guys reaffirm ---- cheese prices around to $60 ---- for the full year.

 

Steve M. Ritchie:

The guidance is using actually kind of price high mid to high $50 we certainly take a look at our forecast as cheese prices move around.

 

David Carlson:

Okay. Thank you.

 

John H. Schnatter:

David this is John the farmer breaks even about a buck 55 a buck 60 a --- so when they start losing the money than that’s not good. Sooner or later the supply demand have to set in and the price will go up.

 

David Carlson:

Thanks guys.

 

Operator:

Thank you. I am showing no further question at this time. I would like to turn the call back over to Lance Tucker for closing remarks.

 

Lance F. Tucker:

Thank you Shannon and thanks everyone for being on the call. We will talk to you next quarter.

 

Operator:

Ladies and gentlemen this concludes today’s conference. Thanks for your participation. Have a wonderful day.

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