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Edited Transcript of PZZA earnings conference call or presentation 6-Aug-19 9:00pm GMT

Q2 2019 Papa John's International Inc Earnings Call

LOUISVILLE Aug 13, 2019 (Thomson StreetEvents) -- Edited Transcript of Papa John's International Inc earnings conference call or presentation Tuesday, August 6, 2019 at 9:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Joseph H. Smith

Papa John's International, Inc. - Senior VP & CFO

* Michael R. Nettles

Papa John's International, Inc. - Executive VP and Chief Operating & Growth Officer

* Steve M. Ritchie

Papa John's International, Inc. - President, CEO & Director

* Steven R. Coke

Papa John's International, Inc. - VP of IR & Strategy Planning

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Conference Call Participants

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* Alton Kemp Stump

Longbow Research LLC - Senior Research Analyst

* Christopher Thomas O'Cull

Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Senior Analyst

* Lauren Danielle Silberman

Crédit Suisse AG, Research Division - Senior Analyst

* Peter Mokhlis Saleh

BTIG, LLC, Research Division - MD and Senior Restaurant Analyst

* William Everett Slabaugh

Stephens Inc., Research Division - MD

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Presentation

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Operator [1]

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Good day, ladies and gentlemen, and welcome to Papa John's Second Quarter 2019 Conference Call and Webcast. (Operator Instructions) As a reminder, this conference is being recorded.

I would now like to introduce your host for today's call, Mr. Steve Coke, Vice President of Investor Relations and Strategy. Mr. Coke, you may now begin.

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Steven R. Coke, Papa John's International, Inc. - VP of IR & Strategy Planning [2]

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Thank you, Sherry. Good afternoon. Joining me on the call today are President and CEO, Steve Ritchie; and our CFO, Joe Smith. Steve and Joe will have comments about our business and provide a financial update. After the prepared remarks, Steve and Joe will be joined by Mike Nettles, our Chief Operating and Growth Officer, 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 Steve Ritchie for his comments. Steve?

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Steve M. Ritchie, Papa John's International, Inc. - President, CEO & Director [3]

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Thank you, Steve, and good afternoon, everyone.

Papa John's second quarter was marked by good progress against our 5 strategic pillars as we delivered results in line with our fiscal 2019 plan. I'll begin with an update on key results. In the second quarter, North America comp sales were down 5.7% versus a decline of 6.9% in the first quarter. This was our third quarter of sequential improvement in comp sales. Negative but improving comp sales reflect the consumer sentiment challenges that the brand has faced over the past 12 months, which are now in the early stages of stabilizing and turning around as we refocus our organization around people and our brand.

For the second half of fiscal 2019, we expect further improvements in North America comp sales as we anniversary-ed events of July 2018 and begin to see the benefits of our strategic turnaround. Consequently, we are raising the bottom end of our guidance for North America comp sales to negative 1% to negative 4% for the full year.

In our strong and growing international business, comp sales swung to positive 0.3% in the quarter driven by a return to positive comp sales growth in U.K. and continued strong positive results in the Middle East. As a result, we are reaffirming our guidance for international comp sales of flat to positive 3% for the full year.

Now I'd like to provide more detail on our progress in the quarter, beginning with some more color on our June announcement that we are increasing investment in marketing and brand initiatives while providing the additional scheduled financial assistance for North America franchisees that will expire in 2020. When Starboard made its strategic investment in Papa John's in February, we said that we intended to use up to half of the initial proceeds or $100 million to advance our strategic priorities, of which strengthening our brand and improving the unit economics to support our franchisees' health are at the top. Of this amount, we announced we're investing an additional $40 million in marketing. Approximately 1/2 will be spent in the second half of 2019 and the other half in 2020, coupled with a 25 basis point increase in the National Marketing Fund contribution rate to 5% of restaurant sales in 2020. This will provide 6 quarters of increased marketing dollars to amplify our differentiated market position and establish a strong national platform for our new brand ambassador, as I'll discuss here in just a moment.

The other element of our June announcement was a $40 million investment in 6 more quarters of tapered royalty relief for our North America franchisees allocated into 3 areas: number one, system-wide relief available to all North America franchisees who agreed to some customary terms and to move on from the past events; number two, system-wide incentive-based royalty relief around guest service targets; and number three, additional needs-based royalty relief for targeted franchisees. By providing franchisees with certainty and transparency on the structure and schedule of remaining royalty relief, our goal is to help them succeed in the short term but also to plan and manage their business into the future. The program, titled [We Win Together], was supported by franchise leadership and has been well received by the franchise system as nearly 100% of our franchisees opted in by last week's deadline. Of this additional $40 million investment in total royalty relief, we estimate spending will be roughly split between the remainder of fiscal 2019 and fiscal 2020. These incremental investments are reflected in our updated guidance for special charges, which Joe will discuss here in just a moment.

The process by which we arrived at this package, announced it and then rolled it out to our North America franchisees reflects the new Papa John's and our commitment to winning together with our franchisees. In late spring, our team led a series of intensive discussions with key franchisee representatives about how we continue the significant progress we have made together over the past 6 months. What emerged was a plan to help our franchisees manage recent sales declines as well as our shared responsibility to reinvigorate the brand and consumer sentiment.

Next, I would like to discuss what we're doing to amplify our brand differentiation, which is the primary strategic goal of the We Win Together program. As we have said, Papa John's partnership with Shaquille O'Neal is an important element of our strategy to reconnect with consumers around our truly differentiated market position. Since he joined the Board of Directors in March, we have finalized the other major elements of our partnership, including his investment in 9 Atlanta area restaurants and the details of his multi-year role as Papa John's brand ambassador. Given the excitement Shaquille has created among the Papa John's team, we have no doubt that he will help drive positive sentiment among consumers as well. So we are very excited to get him off the bench and into a new national advertising campaign coming up this fall. The additional $40 million in the marketing budget will help us amplify that campaign.

Now I'd like to give an update on our strategy for creating accessible value, the other key element of our customer proposition and a strategic pillar for the company. As we've discussed last quarter, we have been testing a number of value and menu constructs, combining our premium specialty pizzas alongside more accessible price points that bring consumers into the brand. Under our new CMO Karlin Linhardt's leadership, this quarter, we enhanced our testing methodologies and are now evaluating several different accessible value constructs in approximately 25% of our U.S. restaurants. Based on our work to date, we're optimistic that these tests will yield an effective national promotion to be rolled out in the future.

Moving on to our progress advancing our technology strategy last quarter. With respect to aggregators, which are a big focus in the industry, Papa John's strategy remains the same: test and learn whenever we have the opportunity to reach guests, including through aggregators. Aggregators still constitute only a small portion of our total orders, but we continue to explore potential opportunities where we believe aggregators represent an incremental sales channel. We continue to invest in our own technology to support and improve direct-to-customer delivery experience. Through our partnership with Drivosity, we'll lead our pizza delivery competitors with GPS-enabled delivery tracking, which is now in over 1,000 U.S. restaurants, up more than double from last quarter.

Finally, I'd like to provide an update on our loyalty program, Papa Rewards. We're more than 6 months into the relaunch of the program, and we've seen stabilization of ticket and positive team member sentiment around the flexibility and ease of use that, that new structure provides. We're pleased with these results and are preparing to scale the new capabilities provided by the underlying loyalty technology to expand our one-to-one targeting of promotions and personalized experiences.

Prioritizing people is another of our strategic pillars and I'd argue the most fundamental to the profound positive changes happening here at Papa John's. Building on the all-star additions to our Board and executive team over the past several quarters, last quarter, we successfully recruited a seasoned operations leader, Jim Norberg, to join the company as SVP, Chief of Restaurant Operations, overseeing all Papa John's corporate and franchise restaurants throughout North America. Jim has an unmatched track record in the QSR industry. Starting his career as the fry guy, he rose to EVP and Chief Operating Officer for McDonald's 14,000 U.S. restaurants. Not only is Jim a highly effective business leader, he is a champion for franchise owners, team members and our guests. His values and approach truly align with our commitment to prioritizing people. We expect Jim to play a critical role maintaining the momentum from the operators' conference, helping franchisees as well as our company operators to succeed by delivering an outstanding total guest experience. On top of recent additions of Marvin Boakye as our Chief People Officer and Karlin Linhardt as our Chief Marketing Officer, this completes the leadership team, which I believe is the most talented team Papa John's has ever had.

Last, I'd like to provide an update on our international business. In the second quarter, our international business again showed its promise as a driver of long-term shareholder value. Total sales grew nearly 10% as we produced over $5 million of pretax income for the second consecutive quarter. Also during the quarter, our United Kingdom operation, which now comprises 425 restaurants, continued to improve its sales results. The management team that came in over a year ago has been working with our franchisees, focusing on improving our marketing efforts. For example, during the quarter, Papa John's U.K. introduced a popular new hot dog pizza as well as our successful vegan version, too, and this month generated a lot of buzz with the new Bee Sting pizza. We continue to have solid results from Latin America and the Middle East. While the European business undergoes some normal growth challenges, we remain very optimistic about a bright outlook for the long-term growth in this region. Finally, our franchisee in Northern China, who purchased the company's operation there a year ago, and our master franchisee in Korea are both having very good years with strong comp sales and unit growth.

In summary, Papa John's had a very solid second quarter. While we still have a lot of work to do, we made good progress against our strategy and delivered results in line with our fiscal 2019 plan. We announced a significant multi-quarter investment in the brand and our franchise system. With the strong support of our franchisees, we can move forward rebuilding our differentiated brand and providing a platform for Shaquille O'Neal as our new brand ambassador coming up this fall. We and our franchisees will now focus on delivering our great products to our guests, meeting and exceeding their expectations so that we can all win together. As always, we remain focused on people and pizza. Speaking on behalf of Papa John's team members and franchisees, I am as excited as ever about the opportunities ahead.

Let me now turn the call over to Joe to discuss our financial results for the second quarter in more detail. Joe?

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Joseph H. Smith, Papa John's International, Inc. - Senior VP & CFO [4]

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Thank you, Steve.

In the second quarter, we reported earnings per diluted share of $0.15 on a GAAP basis compared to diluted earnings per share of $0.35 a year ago. The decline in our earnings per share was primarily attributable to lower North America comparable sales and special charges. Excluding special charges in the current quarter and certain onetime charges in the prior year quarter, we reported adjusted earnings per diluted share of $0.28 on a non-GAAP basis compared to $0.48 a year ago.

The special charges incurred during the second quarter totaled $5.4 million. Approximately $2.5 million included support to our North America restaurants through short-term royalty relief for franchisees. In addition, we contributed an incremental $2.5 million to the Papa John's marketing fund for increased marketing and promotional activities.

Our second quarter pretax income on a GAAP basis was $10 million. Excluding the impact of the previously discussed special charges, our second quarter pretax income was $15.2 million compared to $21.2 million for the corresponding quarter in 2018.

Looking at sales, consolidated second quarter revenues decreased $30.3 million or 7.1%. Excluding the impact of special items, including the refranchising of 62 company-owned restaurants in North America and our China operations during 2018, consolidated revenues decreased $14.3 million or 3.4%, primarily reflecting lower comparable sales for North America, which impacted company-owned restaurant revenues, royalties and North America commissary sales.

Now turning to business unit margins for the second quarter. Domestic company-owned restaurants operating margin decreased $1.8 million primarily due to the impact of lower comparable sales somewhat offset by the favorable impact of current year promotional activities with lower food costs. In addition, we have experienced favorable insurance costs during this quarter. This contributed to the improvement in operating margin of 0.9% as a percentage of related revenues.

North America franchise royalties and fees decreased $4.2 million or 17.4% as a percentage of related revenues as compared to the prior year quarter primarily due to negative comparable sales of 5.3%, the previously mentioned royalty reductions as part of the North America franchise assistance program and an increase in targeted royalty waivers. North America commissary operating margin increased $200,000 or 0.4% as a percentage of related revenues as the impact of lower North America sales volume was more than offset by lower operating costs, including labor.

The international operating margin improved 5.3% as a percentage of related revenues due to the refranchising of China company-owned operations. Excluding the impact of refranchising, our international operating margin was in line with the prior year as the higher royalties from increased equivalent units was offset by the unfavorable impact of foreign exchange rates.

For the second quarter, G&A costs increased $9.7 million primarily due to the previously mentioned $2.5 million contribution to the Papa John's marketing fund included in special charges, a shift in the timing of our operators' conference from the third quarter of 2018 to the second quarter of 2019, higher professional and consulting fees and an increase in management incentive costs. Net interest expense decreased $1.5 million due to lower outstanding debt partially offset by an increase in interest rates as compared to the second quarter of 2018.

Total debt outstanding was $384 million as of June 30, 2019, including $11 million associated with the Papa John's marketing fund. Outstanding debt decreased $241 million from our 2018 year-end balance primarily due to funding from the issuance of Series B preferred stock to Starboard.

The effective income tax rate was 12.9% for the second quarter in comparison to 36.8% for the corresponding quarter in 2018. The lower tax rate primarily reflects the impact of refranchising our China operations during the second quarter of 2018. Our free cash flow, which is a non-GAAP measure that we define as cash flow from operations less capital expenditures and dividends paid to preferred shareholders, was approximately $8.9 million for the first half of 2019 as compared to $51.9 million in the first half of 2018. The decrease was primarily due to lower net income and unfavorable changes in working capital items, including an approximate $20 million of unfavorable timing-related impact from the Papa John's marketing fund.

During the second quarter, we opened 18 restaurants in North America and closed 35 units for a net reduction of 17 restaurants. We also opened 34 international restaurants and closed 8 units for a net increase of 26 units. On a year-to-date basis, we have opened 128 restaurants globally and closed 86 units for a net increase of 42 units. We ended the quarter with 5,345 global restaurants.

We paid a cash dividend of $10.5 million to our common and preferred shareholders during the second quarter of 2019. Subsequent to the second quarter, our Board of Directors declared third quarter cash dividends of approximately $10.5 million to be paid to common and preferred shareholders. The third quarter common stock cash dividends will be $0.225 per common share.

Looking ahead to the remainder of 2019. As Steve mentioned, the recently announced [We Win Together] program provided investments into marketing and support for the North America system beginning in the third quarter of 2019 and continuing through the fourth quarter of 2020. We expect to incur approximately 50% of this investment in 2019 with the remainder in 2020.

As a result of these investments, we are updating our guidance for the following: Our GAAP loss per diluted share is now expected to be negative $0.10 to negative $0.40, reflecting an increase in special charges which are now expected to be $50 million to $60 million for the year compared to prior guidance of $30 million to $50 million. The updated guidance of $50 million to $60 million for 2019 includes the impact of the We Win Together program.

Also, we are narrowing the guidance range for the following: North America comparable sales are now expected to be negative 1% to negative 4% from the previous guidance of negative 1% to negative 5%. Our net global unit growth is now expected to be 100 to 150 units from the previous guidance of 75 to 150 units.

I'll now turn the call back over to Steve Ritchie for his final remarks before we take Q&A. Steve?

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Steve M. Ritchie, Papa John's International, Inc. - President, CEO & Director [5]

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Thank you, Joe.

So Papa John's maintained a strong pace of day-to-day progress and incremental improvements in the second quarter while we also drove further positive change in the foundations of our business: our brand, our franchisees and our people. I'd like to reiterate that [We Win Together] agreement, developed in close collaboration with representatives of our North America franchise system and now receiving the support of almost all of our franchisees, is a major milestone for the company. It allows us to move forward together constructively and positively focused on the future. Just as significantly, the agreement and discussion around it embodied the shared responsibility we all have for the brand which, at the end of the day, comes down to delivering great pizza, great value and great guest experiences. I want to thank our fantastic franchise partners as well as all of the team members in the Papa John's family who work together every day so that we can win together. I look forward to providing more updates over the course of the year as our progress accelerates. As always, we appreciate your continued support.

I'll now turn the call over to the operator for Q&A.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question will come from Will Slabaugh with Stephens Inc.

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William Everett Slabaugh, Stephens Inc., Research Division - MD [2]

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Question on the guidance. You raised your same-store sales guide on the low end, as you mentioned, implying I think positive low singles, at least in the back half. So I'm wondering if you're still expecting that continuation of improvement as we worked through the year, as we've sort of talked about the past couple of quarters. And what could you talk about -- or willing to talk about rather, in terms of what that means or how you feel about how you lapped over the comments from mid-July of last year?

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Steve M. Ritchie, Papa John's International, Inc. - President, CEO & Director [3]

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Sure, Will. It's Steve, and thanks for the questions. So yes, we did raise up the bottom end of that guidance just to indicate that we do have some real confidence around our ability to continue to improve sales. So I think a lot of what we have been doing over the last 4 or 5 months here since the investment from Starboard, the new construct of the executive leadership team, the new construct of the new Board, obviously getting Shaquille O'Neal on board here, and some of the many -- so many of the many things we've been doing to improve overall consumer sentiment. The new executive leaders have been working on the new brand campaign that obviously will coincide with the work that we're going to be doing with Shaquille. In addition to that, we've got multiple value platform tests that are in the marketplace. I give you that backdrop because those are the things that the [We Win Together] $40 million investment -- about half of that $40 million is going to be going into 2019. Those are what drive some optimism for us to know that the back half of the year is going to be getting back to growth. As I've said, the back half of the year, we do expect back to positive sales. I'm not going to get into a cadence or breakdown on a per period or per quarter. What I will say is that was our third quarter of sequential comp sales improvement. There are going to be continued sequential improvements on a quarter-to-quarter, but it's going to be much more significant than what you've seen in the last 3 quarters, obviously indicated by our new updated full year guidance. So we're excited about what's to come here. As we close out the back half of 2019, it is a significant transformational year for the brand. And in 2020, we're going to get back to better.

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William Everett Slabaugh, Stephens Inc., Research Division - MD [4]

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Got it. And one more quick one on value, if I could. It sounds like you have a lot going on there in terms of tests in various markets. So I wonder if you could talk a little bit more around your plans there, if a lot of it revolves around that $6 price point I know you've tested in numerous markets in the past, or if we should think about value taking a different approach.

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Steve M. Ritchie, Papa John's International, Inc. - President, CEO & Director [5]

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So Will, it's Steve again, and Mike might have a comment as well if I don't cover the ground here. So yes, I mean value is something that we've -- has always been important to the Papa John's brand. Certainly, we are the brand that's known for quality, being better ingredients, better pizza and having the best overall pizza in the industry. But value is an important part of what we do. It's not about the price you pay, it's about the experience that you receive. But we also know that we have to have better overall promotional options out there for the consumer to provide that accessible value that we talked about. So the $6 medium price point has been one that we've had out throughout the first part of 2019. There are various different value constructs that we're testing in the marketplace, with various different pizza sizes, various different sides as part of that equation. We've got some new menu items that are out there in test, and those being also part of the promotional test. But there is a lot of also different methodologies on how we're doing this as well and how we read tests because we've done things in the past with tests, but I would tell you that Mike and our new CMO are bringing a lot to the table. So I think it would probably be helpful to give some color, Mike, to how we're kind of reading some of these things.

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Michael R. Nettles, Papa John's International, Inc. - Executive VP and Chief Operating & Growth Officer [6]

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Yes, sure. Thanks, Steve. Will, so the short answer, I think, to your question is we're way beyond just testing a single pie promotion at $6. We started with that, but we wanted to kind of feel out the market space, used the medium as part of that offer. That seems to be fairly typical in the industry. We've expanded beyond that rather dramatically. We're really experimenting with what I'd call a multi-tier price point value construct where we actually offer 3 different sizes of pizzas, like Steve said, at 3 different value price constructs, all of them being one top with an up-sell engine capability to allow us to quickly add multiple toppings on it to try to get to something that, quite frankly, in the old days may have been like a $10.00 3 top. We can do that with a multi-variant kind of pricing construct, really get a lot of people excited. They come in like you do. It's very traditional in the retail business. You see a very inexpensive entry price point. Maybe you'll hover on that and click a little bit deeper. But once you're in, you suddenly start to realize I really want something a little bit better, and then you start to trade up through the tiers. So we're having a lot of success with that in the early stages, different models in different places, observant to the brand. You might actually find markets out there that are participating in that right now. As Steve said, we have that up and operating in some flavor or another in several hundred locations.

But at the same time, the testing methodology we're doing is very driven on test and control. We've lined up every single store with look-alike stores around the country and even with look-alike customer profiles and purchasing behavior. And then we're able to do really refined testing to be able to say, hey, that worked, that worked a little bit better. Let's keep tweaking it. Let's test it again, over and over again. And we're not in test forever mode. We are looking to deploy some of these things within a short time frame. But at the same time, we can do so with some projectability and predictability about the outcome as opposed to, hey, let's just throw that on the wall and see if it works. So very happy with how the team is using all the data investments we've made in the last year, particularly around understanding customer behavior and tracking customer behavior, to really try to inform some very big differentiators for the brand and something we can feel very confident about how the performance will be prior to actually launching it.

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Steve M. Ritchie, Papa John's International, Inc. - President, CEO & Director [7]

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Yes. So Will -- and thank you, Mike. So I think it's important to understand the sophistication behind our testing methodologies. We continue to make enhancements based on not only the data but also the technology and analysis and the real talent that we have capability-wise. But at the end of the day, it's all about transactions, but it's also -- it's most importantly about incremental transactions. But 3 key things for success in these tests as we look at these value platforms, that's incremental sales, incremental transactions and incremental profitability. Our franchise unit economics is absolutely critical for growth so that they continue to reinvest in the business. So spent some time on that one because that's obviously a critical component of some of the investment dollars that we're going to be putting into the marketing world with the $40 million that we got coming on the marketing side that will also not only support the Shaquille O'Neal brand campaign but also new promotional campaigns.

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Operator [8]

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Our next question comes from Peter Saleh with BTIG.

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Peter Mokhlis Saleh, BTIG, LLC, Research Division - MD and Senior Restaurant Analyst [9]

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Steve, I just wanted to be clear on the guidance -- the top line guidance, same-store sales change. Is that a reflection of what you're already seeing in the current quarter? Or is this more of a reflection of what you expect to see post the Shaq campaign launch?

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Steve M. Ritchie, Papa John's International, Inc. - President, CEO & Director [10]

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So Peter, it's Steve. Thanks for the question. So I think what we have to do -- obviously, until you get these things in the marketplace, there's a level of uncertainty, but what we -- we obviously -- the marketing team and the finance team did a lot of analysis and predictions around how do you model out the investment levels that we're going to put into the marketplace, when are those things coming in, what are we putting them against in terms of a branding initiative, obviously, tied with Shaquille O'Neal, which we're excited about, but also the value platforms, when those things might come into the world and what kind of impact they may have.

It's still early with some of the testing, but we did have enough confidence to know that the bottom end of the guidance needed to come up from a 5 to a 4. We didn't take the top end up because there's still a level of uncertainty around where we are in the overall business. Clearly, with the first couple of quarters in the year, we have a significant level of improvement to get to that top end of the full year guidance, but there's a lot of things that are very exciting that we have planned here in the back half of the year.

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Peter Mokhlis Saleh, BTIG, LLC, Research Division - MD and Senior Restaurant Analyst [11]

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Great. And then just on the -- I think you said you have planned to spend 50% of the $80 million investment in 2019. That implies $40 million. Given the run rate on the royalty assistance to the franchisee, it kind of implies you guys will be spending about $30 million on marketing in the back end of the year. Is that correct?

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Steve M. Ritchie, Papa John's International, Inc. - President, CEO & Director [12]

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What we called out, Peter, is about a 50-50 split. So to your point, 50% of the $80 million is going into 2019. Of that $40 million, 50% is towards royalties and the other 50% towards marketing. And those are approximates to the dollar because we're still going through the final planning stages. More specifically on the marketing side, the royalties are pretty locked and, obviously, they're only impacted by revenue changes. But yes, a significant amount of marketing dollars are going to come in here in the back half of the year.

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Peter Mokhlis Saleh, BTIG, LLC, Research Division - MD and Senior Restaurant Analyst [13]

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Got it. And then just my last question. What kind of comp do the franchisees need in this environment with the assistance that you're providing to hold their margins flat to their [rational-level] margins?

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Steve M. Ritchie, Papa John's International, Inc. - President, CEO & Director [14]

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Peter, it's Steve. I mean it's certainly going to vary by market because there's obviously a lot of puts and takes out there in the marketplace geographically. And on the competitive side, there's different pricing variations that differ from market to market. So different levels of comp are required to just stabilize the overall unit economic model, which is why we didn't just do broad-brush royalty relief and support across the board. There is a level of targeted support for franchisees in different marketplaces that are more challenged and need more sales lift to get their model a little bit more -- a little healthier. So it does vary a bit. We know our margins are going to be backwards until we get back to positive sales. It's the bottom line, which is what we expect to do in the back half of this year, get back to positive sales and then get back to the kind of growth that we expect for this brand that we -- we've produced 14 consecutive years of flat to positive sales growth in North America. So we know the brand is capable of doing that. We've just got to get the business stabilized here, which as these -- as you probably know, these types of situations have a tendency to have about an 18-month turnaround. We're right about the 12-month point here just last month. So what we're trying to do everything in our power is to accelerate that 18-month turnaround and getting back to growth.

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Operator [15]

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Our next question comes from Alton Stump with Longbow Research.

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Alton Kemp Stump, Longbow Research LLC - Senior Research Analyst [16]

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First off for Joe. Just as far as you're raising the lower end of global unit growth guidance, can you give some color on, is that U.S. or is it international, is it perhaps less closures? Any thought here domestically, kind of what's driving -- causing that lower end coming up to 100 units?

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Joseph H. Smith, Papa John's International, Inc. - Senior VP & CFO [17]

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Yes, this is Joe. Again, probably most of that is just our closings. As you can see, for the first 6 months, they have improved and even over the last year and better than probably our original forecast. So it has mostly to do with the domestic side of the business. And I think that shows with some of the targeted royalty relief and also the other assistance we've given that we've been able to keep closings down domestically than from our original forecasts.

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Steve M. Ritchie, Papa John's International, Inc. - President, CEO & Director [18]

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I think that's a great point, Joe, because it's -- the programs that we introduced and we had the operations conference. A lot of this is also just about confidence in the future. The ability for the management team to get the business moving back in the right direction has the ability to mitigate some of these closures. So we are pleased to see it's mitigated. We don't like any closures. I hate to see a single closure, but the very fact that we are seeing lower closures than we initially expected based on the sales pressure, I think, is very positive. And I think Joe and the team did a great job of really modeling out what level of support that we needed to provide across the board to the right franchisees.

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Alton Kemp Stump, Longbow Research LLC - Senior Research Analyst [19]

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Good. And there's a follow-up. As you deal with, of course, the third-party delivery guy, which I think you were the first one to do it in the industry. How is that going so far? It's awfully early, but are you seeing any [incrementality] as you use that third-party provider?

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Steve M. Ritchie, Papa John's International, Inc. - President, CEO & Director [20]

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Chris (sic) [Alton], I'm sorry, you broke up a little bit, but I think your question -- Alton, I'm sorry. I think your question specifically was about aggregators. Is that what you were asking?

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Alton Kemp Stump, Longbow Research LLC - Senior Research Analyst [21]

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Yes.

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Steve M. Ritchie, Papa John's International, Inc. - President, CEO & Director [22]

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Okay. So we've been -- as you know, we've been in a partnership with DoorDash for well over a year, and with Postmates now almost as long. It's actually going very well for us. I wouldn't say we're 100% deployed. We've got a few challenges that were left to finish deployment to all of our stores and, certainly, there's some geography where some of these large aggregators play better than others. It does represent a substantial part of our growth for the future when we start to look at it. Right now it's a pretty modest impact overall to sales, but we've noticed some things. Part of the deal that we've actually done with these large national aggregators is make sure that we take a hard look at that customer data again. And what we see, there is an outsized portion of these customers that are new to the brand, new to us. We're able to tell that we've not seen them before, which really is in keeping with our strategy of being where the customers want us to be so that we can remain accessible to them regardless of how they choose to place orders for the product. We do have plans to continue expansion with this. We actually are looking and talking to a number of other large national aggregators. And we see this as a future growth opportunity for us, not just as a new customer acquisition channel, but the ability to market to customers through those captive channels and continue to service them in the means that they prefer as opposed to having all of them have to come to the Papa John's brand. With our loyalty program and with other digital strengths, we really believe that's still going to be the lion's share of where we see the activity. But it's certainly a growth opportunity for us, and we want to make sure that we leverage it appropriately.

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Operator [23]

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Our next question comes from Christopher O'Cull with Stifel.

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Christopher Thomas O'Cull, Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Senior Analyst [24]

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First, Joe, you mentioned about half of the $80 million investment would be incurred during '19. How much of that is the targeted needs-based relief?

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Joseph H. Smith, Papa John's International, Inc. - Senior VP & CFO [25]

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That's a small part of it, again, but on the special charge, we don't include that as -- that's separate from that because we don't include targeted relief as part of the special charge. But it is a part of the half of the release that we will give, Chris.

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Christopher Thomas O'Cull, Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Senior Analyst [26]

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Okay. And then does the royalty relief come with a condition that franchisees will need to participate in whatever value construct you guys choose to promote?

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Joseph H. Smith, Papa John's International, Inc. - Senior VP & CFO [27]

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No, it does not...

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Steve M. Ritchie, Papa John's International, Inc. - President, CEO & Director [28]

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Well, it's an interesting question, Chris. So any national promotion -- all franchisees have to honor our national promotions. So if it did -- if one of those value constructs became a national promotion, that is just part of our normal agreement that we have with our franchisees. And frankly, that's something that they traditionally agree to do because it's obviously going to be more impactful if we can all aggregate our dollars and support the same promotion. The only thing that was tied to the agreement for the royalty release was a general liability release for our franchisees.

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Christopher Thomas O'Cull, Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Senior Analyst [29]

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Okay. And then I know in the past, franchisees have really focused on margin percent when they look at offers and promotions. So does the new value construct require them to think differently about the margin in terms of maybe focus more on transaction margin dollar growth rather than the margin percent? Because some of the ones I've seen in test seem to be pretty aggressive discounts relative to what you guys have historically done.

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Steve M. Ritchie, Papa John's International, Inc. - President, CEO & Director [30]

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Sure, Chris. It's Steve. Our franchisees as well -- and, technically, I guess, the company is the largest franchisee as we own a lot of the stores. So we're able to kind of balance and understand as we look at things we call profit after FLM, profit after food, labor, mileage. So incremental sales, and that drives the incremental profitability, that being driven by transactions. But as I've said in my earlier remarks, there's 3 different really key criteria for success of the test: that's driving incremental sales, incremental transactions and incremental profitability versus, as Mike talked about, the more sophisticated testing methodology on looking at the right control groups and like-for-likes and also comparing against the system. So we're enhancing the way that we're thinking about this. I think all of our franchisees understand the importance of value and what it plays. The promotions have to be effective to drive traffic growth. Certainly, from market to market, there's different desires to promote different things, but we have to take the power of 1 national brand, and we really believe if we can get our arms around that and do it effectively, that really will extract a tremendous amount of traffic growth for the brand when you combine it with the brand enhancements we're going to be making in the new campaign that will be coming up later this year.

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Christopher Thomas O'Cull, Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Senior Analyst [31]

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Okay. And then Joe, how much did the impact of shifting the timing of the operations conference have on G&A this quarter? And should we expect that amount to kind of benefit the third quarter comparison?

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Joseph H. Smith, Papa John's International, Inc. - Senior VP & CFO [32]

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Yes, Chris, that's roughly a couple of million dollars, and you're right, that should come back and benefit Q3.

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Christopher Thomas O'Cull, Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Senior Analyst [33]

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Okay. And then just lastly, I know you guys in the past have helped the -- or contributed to the U.K.'s ad fund, or I believe you have. Has that continued?

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Joseph H. Smith, Papa John's International, Inc. - Senior VP & CFO [34]

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Yes, we continue to work with the U.K. team, and you can see some of the improvement they've had. And again, we -- as you said, over the years, we have continued to make various contributions to that, and that is just part of the regular operations. It's something we continue to look at every year and make various amounts of contributions, depending on the business and some of the activities that we have, and that's something we're continuing to do this year.

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Steve M. Ritchie, Papa John's International, Inc. - President, CEO & Director [35]

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Yes, Chris, that's -- we always support all of our franchisees around the world. In the international business, the U.K. is different, as you know, because we also own the quality control center, and we are the master franchisee for all the franchisees in the U.K. So certainly, some additional revenue streams coming in there so there is -- return on investment models work in various ways in the U.K. But a very successful market for us and our largest market, not only in terms of stores, but in terms of royalty revenues coming in. A very key market. And as I've said in my opening remarks, we're very excited to see the U.K. getting back to positive comps in the quarter, and we've got a fantastic new Operations Director, Liz Williams, in the U.K. that is leading those efforts and really doing some tremendous work. So we'll always continue to evaluate how we can invest behind that market to continue sustainable growth.

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Christopher Thomas O'Cull, Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Senior Analyst [36]

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Great. And then just lastly, the segment -- when you look at the segment profit, the North America commissary operation has been under some pressure, and probably largely because of just the transaction declines and the fixed cost nature of the business. But is there anything you guys can do to rightsize that segment in terms -- I mean because I know you've built up capacity over the years, anticipating a lot of growth, and now that it's slowed domestically, is there anything you can do to jettison some of those fixed assets or to at least downsize that segment?

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Joseph H. Smith, Papa John's International, Inc. - Senior VP & CFO [37]

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Yes. This is Joe. I'll start, and Steve can add in. But I think our team does continue to look at different things. So maybe production schedules used to be 6x -- or 6 days a week and now they're going to 4, as an example. With the addition, you did improve some delivery costs. I think that's why you see -- we saw some improvement, as I mentioned about, in labor costs as we continue to, as you say, rightsize the business with -- on the amount of volume that we have. You do, obviously, have trade-offs because you have to have QCCs close enough that you keep the delivery cost down. So our team continues to look at that, challenge the level of how many days of production. They also look at the best way to deliver, and they're always challenging the cost to try to reduce things. So we are doing that. Steve...

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Steve M. Ritchie, Papa John's International, Inc. - President, CEO & Director [38]

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Yes. No, Joe, I mean you've hit some of the good ones in the short term, what we can do to offset. So we have to think about this business, obviously, in the long term. So this is a brand that has been impacted by some extraordinary things, so we're in the midst of a turnaround. The QCCs have been a very healthy business model for us. The cost of capital is very low. They produce a lot of income for us, and they're great for our franchisees because they provide not only quality, they provide consistency. So we've built that 11th QCC down in Georgia 2 years ago for good reason because we're building for the future. And we're going to turn this thing around. So we've got 11 QCCs, they can support the future of this brand, and we're not going to make short-term decisions that negatively impact it. But at the same time, Joe is hitting good points. We're always trying to find out ways to be more efficient as long as they do not at all have any risk of stunting our ability to restimulate the growth that is absolutely necessary for our brand.

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Operator [39]

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Our next question is from Lauren Silberman with Crédit Suisse.

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Lauren Danielle Silberman, Crédit Suisse AG, Research Division - Senior Analyst [40]

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You indicated consumer sentiment challenges are in the early stages of stabilizing and turning around. Can you expand on that commentary? Any metrics you can provide that gives you confidence in that stabilization? And then just related to that, could you give any color on how same-store sales and traffic trended throughout the quarter?

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Steve M. Ritchie, Papa John's International, Inc. - President, CEO & Director [41]

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I'll get the second part. Mike, can you get the first part?

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Michael R. Nettles, Papa John's International, Inc. - Executive VP and Chief Operating & Growth Officer [42]

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Lauren, it's Mike. As Steve said, I'll try to grab the customer sentiment piece first. So we use a number of diagnostic tools to measure that. One of the objective measures we use is YouGov. YouGov is the brand index and a number of other different measures, pretty standard in our industry. So we're able to track that almost on a period-by-period basis. It's not absolute, but it's certainly directional. And what we've seen is a remarkable, constant, steady improvement over the last periods, 12 periods since last year in particular. We can also definitely see when the Papa John's Foundation makes a major endowment or we have other positive publicity, the YouGov brand sentiment index tends to trend upward as well. So a lot of our internal work at just being better corporate citizens, a lot of our foundation work, a lot of our work internally and externally on really cultural improvements and trying to enhance our diversity and our inclusiveness have really started to be noticed, I think, by customers in general.

And then finally, maybe more subjective on the inside, we have a wonderful loyalty program that we relaunched last year that gives us tremendous amounts of insight in guest behavior. And it's viewing mostly in looking at their number of repeat visits or their repurchase intent. We see that in terms of their willingness to come back to the brand, their willingness to being more loyal to us as a brand and, quite frankly, giving us credit for some of the outstanding work that our operators are doing in trying to serve a better product, deliver a better product and give us better scores around overall satisfaction as a result of it. So we take all of those metrics together, and it's pretty resounding, things are improving. It doesn't mean we're where we want to be yet. We've got lots of opportunity and headroom to continue improving, but a lot of our work effort is starting to be rewarded as customers come back to the brand.

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Steve M. Ritchie, Papa John's International, Inc. - President, CEO & Director [43]

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Yes. So I think Mike hits all the key points on sentiment. I'd say we're close to where we were last year at this time, but we had a drop that started in the fourth quarter of 2017. So we have some additional work to go. We believe some of the work that we're going to be introducing later this year will continue to show improvement in that area. Executing at a high level so that we've got great guest experience with our new Chief Restaurant Operations Officer and the work that Jim is going to be leading also plays a key part in overall consumer sentiment.

So the other question, Lauren, just on cadence of comps throughout the quarter, I don't want to get into specifics, but I can tell you that we had the same promotional price point of $12 for 3 different versions of specialty pizzas. So there wasn't any kind of significant kind of difference in the promotional side, and there wasn't any real disparity in our level of marketing and investments across that. As I've stated earlier, it really was a bridge kind of quarter. We're just trying to put some things together as we're building the plans for the future, stabilize the business as best as possible while we're really building robust plans to get back to the growth that I continue talking about here, but nothing really significant to call out.

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Lauren Danielle Silberman, Crédit Suisse AG, Research Division - Senior Analyst [44]

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Great. And then just bigger picture, any thoughts on how the pizza segment overall is being impacted by the strong growth of the third-party aggregators?

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Steve M. Ritchie, Papa John's International, Inc. - President, CEO & Director [45]

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Sure. I'll start, Lauren, and Mike, if you've got a comment, jump in. There's no doubt. We obviously track market share data on a monthly basis around here through various different third-party research groups. There's some impact that's happening within the overall category. That impact to the category is really a share shift in that we're seeing some of the lift within the share side happening within the independents, which have obviously been a share donor for the last 7 or 8 years to the national players within the category because of the digital and technology and also the economies of scale and the marketing spend. Whether that's long term or sustainable, I'd say it's probably too early to tell. But for our business, specifically, which I like what we've done here with our partnerships, as Mike had spoken to, the incremental lift that we're seeing through our partnerships with the aggregators, really, that's offsetting the impact it's having to the national players within the category. So in general, we're at a wash. Whatever impact -- modest impact we're having on the comps, we're offsetting that with a modest increase we're getting with the gain.

So it's something we're going to continue to monitor to see if this is a continuation with the independents. My belief is that the national players will regain growth longer term in the future here because there's a lot of marketing investment that's happening within the aggregator space that's driving some visibility, and there is a lot of learnings that I can tell you we're getting in real time on how we'll promote and partner with the aggregators in various different ways beyond just promotional activities.

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Operator [46]

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And we do have a follow-up from Peter Saleh with BTIG.

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Peter Mokhlis Saleh, BTIG, LLC, Research Division - MD and Senior Restaurant Analyst [47]

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Steve, just a quick question on the value. Do you guys anticipate any upgrades to any equipment or any incremental investments on the franchisees' part to support the value rollout, if any, in -- later this year?

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Steve M. Ritchie, Papa John's International, Inc. - President, CEO & Director [48]

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Nothing of any kind of significance that's material, Peter. And some of these value tests are tied to some -- as I've said, some menu items or new product introductions, but we don't have anything that we're looking at here that's any kind of significant investment required for our franchisees.

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Operator [49]

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Ladies and gentlemen, thank you for participating in today's question-and-answer session. I would now like to turn the call back over to management for any closing remarks.

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Steve M. Ritchie, Papa John's International, Inc. - President, CEO & Director [50]

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So I just want to thank you, everybody, for your continued support and just reiterate our excitement around the future for the Papa John's brand. Certainly, the first half of the year, a tremendous amount of change management and transformation within the organization. Now it is our job and our responsibility, and we are excited to do the work that is necessary to get this brand back to growth. So we look forward to talking to you after our third quarter results are to be reported. Have a great evening.

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Operator [51]

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Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may all disconnect, and have a wonderful day.