Papa Johns International Inc (NASDAQ: PZZA) Q2 2021 earnings call dated Aug. 05, 2021.
Corporate Participants:
Steve Coke — Senior Vice President, Financial Operations, Accounting and Reporting
Rob Lynch — President and Chief Executive Officer
Ann Gugino — Chief Financial Officer
Analysts:
Alex Slagle — Jefferies — Analyst
Eric Gonzalez — KeyBanc — Analyst
Peter Sala — BTIG — Analyst
Lauren Silberman — Credit Suisse — Analyst
Alton Stump — Longbow Research — Analyst
Dennis Geiger — UBS — Analyst
Brian Mullan — Deutsche Bank — Analyst
Brett Levy — MKM Partners — Analyst
Patrick Keeley — Stifel — Analyst
Andrew Strelzik — BMO — Analyst
Brian Bittner — Oppenheimer & Company — Analyst
James Rutherford — Stephens Inc — Analyst
Todd Brooks — C.L. King & Associates — Analyst
Presentation:
Operator
Operator: Good day and thank you for standing by. Welcome to the Papa John’s Second Quarter 2021 Conference Call and Webcast. [Operator Instructions]
I’ll now like to hand the conference over to your speaker today, Mr. Steve Coke, Senior Vice President of Financial Operations, Accounting, and Reporting. Please go ahead.
Steve Coke — Senior Vice President, Financial Operations, Accounting and Reporting
Thank you. Good morning, everyone. Joining me on the call today are President and CEO, Rob Lynch, and our CFO, Ann Gugino. Rob and Ann will comment on our business and provide a financial update. After the prepared remarks, both will be available for Q&A. Our discussion today will contain forward-looking statements involving risks that could cause actual results to differ materially from these statements. Forward-looking statements should be considered in conjunction with the cautionary statements in our earnings release and the risk factors included in our SEC filings. Please refer to our earnings release in the Investor Relations section of our website for a reconciliation of non-GAAP financial measures discussed on this call. Finally, we ask any members of the media to be in a listen-only mode.
Now, I’d like to turn the call over to Rob Lynch for his comments. Rob?
Rob Lynch — President and Chief Executive Officer
Thank you, Steve. And welcome, everyone, to our 2021 second quarter earnings call. Q2 was a very strong quarter for the Papa John’s system, despite ongoing uncertainty, regarding COVID-19 in the global pandemic. This has been a very challenging time for all of us. Surges, vaccinations and now new variants continue to create a dynamic situation that requires continuous evolution of our business and every business model across the globe. Despite this environment, Papa John’s has stayed focused on the same set of core priorities, keeping our team members and customers safe, delivering operational excellence, driving innovation across everything that we do, and accelerating global development. We remain hopeful, that this pandemic and the terrible impact it’s had on people and communities everywhere, will come to an end soon. But we’re more confident than ever, that Papa John’s will be able to continue serving our customers and outperforming our industry, regardless of the challenges that we face ahead. I’m proud to announce, that we have now delivered seven straight quarters of global comp sales outperformance. Coming out of Q2, when we had the lap the initial global shutdown and commensurate surge in our business, we firmly believe, that the foundations on which we have built this turnaround are built last. Looking system wide global restaurant sales in Q2 rose 12% to $1.2 billion. On a trailing 12 month basis, Papa John’s global restaurant sales exceeded $4.5 billion. North America comp sales rose 5.2% in the second quarter, as we lap last year’s record of 28% in Q2 2020. In particular the continued strength of Epic Stuffed Crust combined with the launch of Papa John’s trusted property in June draw a strong customer acquisition and helped us retain many of the new customers that we acquired in 2020. Our innovation pipeline continues to be very incremental to both sales and profits.
International comp sales were up 21.2%, on top of last year’s 5.3% gain. We saw continued momentum in the UK, which is our largest international market, but we also gained across multiple other markets, as we lap temporary closures caused by pandemic related restrictions a year ago. A measure of the brand’s long term growth trajectory comparable sales rose 33% in North America and 27% internationally on a two-year basis. AUVs continue to rise now beyond the $1 million level in North America with much of that topline growth flowing through the unit profitability. The brand has never been stronger. Our strategy is sustainably impacting every area of our business. Papa John’s brand and highly attractive unit economics are generating increasing interest and accelerating restaurant openings, among both new and existing franchisees. We added 55 net new units in Q2 on top of the 68 net new units that we added in Q1. The first half of 2021 was our strongest for net new unit growth in the brand’s history. With 176 new units added to our system over the past 12 months unit growth is becoming a bigger part of Papa John’s system wide sales growth. And with strong development deal flow as I’ll discuss in a moment, we’re on track for accelerating system wide sales growth in the future. Quickly reviewing our financial results, operating leverage on nearly 12% revenue growth drove substantially higher margins profits and free cash flow in Q2. Adjusted EPS nearly doubled to $0.93 a share from $0.48 a year ago. We generated over $100 million of free cash flow in the first half of 2021, defined as operating cash flow less capital expenditures and dividends paid to preferred shareholders. This was up 50% from a year ago, even as we increase strategic investments in our growth.
We’re committed to implementing a balanced capital allocation strategy. Our priorities are investing in growth, maintaining a strong and flexible balance sheet, and returning cash to shareholders to enhance returns. Last quarter we completed the transaction to repurchase and convert all of our series B preferred stock. The transaction is a milestone in Papa John’s transformation since 2019 when those shares were issued. This transaction was possible because of our strong financial performance over the past two years. Now with a more simplified and optimized capital structure, we are able to create even more value for our shareholders, as demonstrated by the 56% increase in our dividend that we announced this morning, and we’ll discuss our progress in all areas of our capital allocation strategy in a moment, along with more detailed financial results. But now I’d like to spend a moment, providing an update on our strategic plan and outlook. Papa John’s innovation strategy touches all aspects of our business; menu, technology, customer experience, delivery, and development. Through careful execution we’re successfully achieving consistent share gains and comp sales outperformance, expanding our customer base and growing our global footprint. Each quarter of positive results adds to the brand’s momentum and our optimism about Papa John’s near and long term growth outlook. With regard to our menu, we continue to see the long term benefits of our strategy around creating premium differentiated new menu platforms. Carefully balanced with investments in quality on our poor menu items and compelling LTO’s, our new innovation platforms like Papadias and Epic Stuffed Crust are built to sustainably grow our business.
Nearly eight months after its launch, Epic Stuffed Crust continues to be a huge success with customers and having pizza lovers in particular. Our biggest new product platform ever Epic Stuffed Crust drove a significant increase in ticket and customer traffic and both Q1 and Q2. In June we launched Parmesan Crust Papadias which are premium item priced at $7 compared to original Papadias at $6. This segmented pricing strategy allows consumers to self-select into a premium product, while still maintaining the value proposition that the original Papadia offers. As we have said, the entire Papadias platform has proven to be largely incremental to our core pizza sale. Papadias are often purchased as an add-on to what would traditionally be a pizza only order without adding much complexity to our stores. In the second half of 2021, we expect Epic Stuffed Crust in Papadias will continue to be a foundation for our sustainable growth plan. Turning to our Digital Innovation. Last quarter our Papa Rewards loyalty program reached a major milestone, growing to over 20 million members. This is an increase of more than 5 million members since Q2 of 2020. Papa Rewards members now represent approximately half of all sales. This is a very valuable segment of our business. We’re able to directly engage these loyal customers with targeted personalized offers to drive higher frequency, higher ticket and higher satisfaction. As a result, they are significantly more profitable than non-loyalty customers. Papa Rewards members continue growing as we now give our customers even more reasons to join our loyalty program like early access to new products. The launch of Epic Stuffed Crust and Parmesan Crusted Papadias were both preceded by member only access acquisition programs and we saw significant increases in sign-ups. Since the beginning of the year, we have added nearly 500,000 new Papa Rewards members per month.
Papa John’s was the first National Pizza brand to offer online ordering, and we’ve maintained a long history of innovating around our customers’ digital experience. Our category leading partnerships with third-party delivery aggregators is one key aspect of this strategy. In June, we integrated Grubhub into our system, adding to our existing national partnerships with Uber Eats, DoorDash and Postmates. Our goal has always been to make our products available wherever our customers want to purchase them. This continues to be a winning strategy with respect to aggregators. As these partnerships bring additional customers to the brand, they drive incremental and profitable transactions. Our partners also benefit as we provide substantial scale and order flow for their platforms. Our domestic sales through these channels grew almost 50% in the past 12 months. These great results directly benefit our unit level economics, as I previously indicated ABS [Phonetic] have grown above 1 million in North America on a trailing 12-month basis. It has been reported widely that the restaurant industry faces headwinds from commodity inflation. We’ve seen this in our business as well. But we believe Papa John’s has two advantages in our ability to manage these input costs. First, we operate a vertically integrated supply chain, which allows us to continue to find areas of productivity and reduce costs. Second, we believe that our premium brand positioning gives us more pricing power, should we determine we need to take that path. Both give us more room to manage and offset external cost pressures, while continuing to deliver quality and value to our customers. Papa John unit growth and development activities are taking hold. In 2020, we consistently stated that we were building the foundation to significantly accelerate development growth in 2021 and beyond. Today, we’re pleased to announce that in Q2, our global new unit growth set a company record.
Our new development team and infrastructure have moved quickly to meet the dramatic rise in interest from well-financed and experienced franchisee, both current and new. Our franchisees are focused on investing capital back into Papa John’s system and the development strategy we put in place last year is bearing fruit. This morning we announced an agreement with our largest international franchisee Drake Food Services International to open over 220 net new stores by 2025 across Latin America, Spain, Portugal and the UK. Drake is a valuable and respected franchisee, and we’re happy that this agreement will double their footprint by 2025. We’re very excited about a number of upcoming domestic and international deals with new franchisees, who bring the financial resources and operating experience. We see this as another important validation of the brand’s promise and potential, especially given our enormous global development whitespace. Now I’d like to address the current labor market, an area where we continue to act deliberately guided by our values to become the employer of choice in our industry through the compensation, benefits, opportunities and culture that we offer. In July, we announced new hiring referral and appreciation bonuses for frontline corporate team members. We also made permanent the expanded health, wellness, pay time off, and college tuition benefits we rolled out during the pandemic. Our franchisees are equally committed to supporting and appreciating their team members. After hiring more than 30,000 new positions last year, we continue our aggressive hiring plans to meet the needs of our growing business and customer base. Later this month we’re sponsoring a national hiring week, with resources for our corporate and franchise teams to showcase our unique culture and a fun way of welcome new team members.
We’re very excited about continuing to grow the Papa John’s family. Based on the strong results we’ve announced today, our ability to execute our strategy and our optimism about the business we want to provide some color on our outlook for the remainder of the year beyond. For the second half of 2021, we currently expect to deliver low, mid single digit comparable sales growth on top of very strong prior year results with year-over-year gains in earnings. As per development, given last quarter strong performance and accelerating interest from existing and new franchisees looking to invest in the brand we are raising our global unit growth outlook to approximately 220 to 260 net new units this fiscal year. And we’ll discuss our outlook in more detail in a moment, but the top line rationale for our confidence in our 2021 outlook is twofold. First, after achieving record sales and applying millions of new customers over the last year, we successfully held on to those new customers, and anticipate more growth in the back half of 2021 Second, after rebuilding our development team and achieving healthy ATVs and unit economics over the past six quarters, new unit growth and deal flow accelerated dramatically in the first half of 2021, and we see the momentum continuing for the rest of the year. With our optimism and Papa John’s opportunity building every quarter, we are focused on ensuring that we have the team capabilities and infrastructure to sustain our growth for the long term.
And now I’ll turn the call over to Ann to discuss our financial results and outlook in more detail. Ann?
Ann Gugino — Chief Financial Officer
Thanks, Rob, and good morning everyone, as Rob described, Papa John’s consistent positive trajectory in late 2019, has affirmed our confidence in the comprehensive transformation that we are executing at the same time, it has significantly strengthened our financial position and long-term outlook. As I stated on my first earnings call with a company last fall, one of my top goals has been to align our balance sheet and long-term capital allocation priorities with a business’s improving growth trajectory, cash generation potential and investment opportunities. Our capital allocation priorities are straightforward. First, to invest in strategic, accretive opportunities to grow the brand and its long-term profitability. Second, to maintain a strong and efficient balance sheet that provides optionality and security. And third, to enhance long-term shareholder returns by returning capital exceeding the needs of our other priorities. I’m pleased with the progress we’ve made against all three areas. Since January, we have substantially increased our growth investments in new store development. We expect our first tranche of company owned restaurants to open in September, was more expected in the fall. As we have discussed, not only our company owned stores, high return investments in themselves, they also create optionality. And we seek out prospective and current and developing franchisees to open up in new territories, and accelerate our development, growth. Our strategic growth investments have also included new customer facing technology, as well as our long-term innovation and development capabilities, including our new office in Atlanta, which we expect to open this fall. We have maintained a strong balance sheet. This has provided an essential foundation as we navigated the pandemic, ensuring we had the liquidity and cash necessary to meet the strong surge in demand.
In May, we simplified our balance sheet by retiring all the shares of our Series B convertible preferred stock, the transaction lowered our cost of capital and benefited long-term free cash flow and earnings, while only minimally increasing our leverage. We have continued to return significant capital to shareholders. In total, we have invested nearly 240 million in dividend, share repurchases and retiring the Series B stock over the past four quarters. As part of the Series B transaction, we also repurchased approximately one-third of the shares on an as converted basis, further enhancing long-term earnings and equity value for common shareholders. As a next step, today we announced we are raising our annual dividend from $0.90 to $1.40 per share, a 56% increase. After another quarter of outperformance, we are taking this action, consistent with our confidence in Papa John’s future, as well as our commitment to a balanced approach to enhancing shareholder returns. I find out that the implied cash outlays of the increased dividends are funded largely by the elimination of the Series D dividends and $1.40 per share, Papa John’s dividend yield is now in line with the median for the S&P 500. Looking ahead, with our bank debt maturing in nearly a year, we are beginning the refinancing process, which is a natural catalyst for us to continue to look at ways to optimize our capital structure. Our goal is to maintain an efficient cost of capital with drypowder for flexibility to feel future growth. To summarize, we continue to be very intentional in our approach to capital allocation in the balance sheet. Over the past four quarters, we have taken substantial actions to invest in growth, optimize our balance sheet and enhance shareholder return. We look forward to taking further steps to evolve our capital structure to align with our priorities, and new outlook. Now let me turn to our financial results for the quarter, as Rob discussed, our record momentum continued in the second quarter of 2021. Our innovation strategy, which is helping us retain customers and drive ticket growth, as well as the benefits of accelerating unit growth, contributed to strong top line growth. Top line growth of 11.8%, operating leverage and the expiration of temporary franchise support versus the prior year, more than offset commodity and labor pressures. Adjusted operating income rose 55% year-over-year and margins expanded almost 300 basis points.
On a segment basis, all of our strategic business units contributed meaningfully to top line growth, as we surpassed the $0.5 billion in revenue for a second consecutive quarter. Operating income growth was driven by strong revenue and higher comparable sales and year-over-year unit growth domestically and internationally. In North America, reduced franchise support provided for additional royalties of 5.1 million, compared to the comparable period in 2020. Our restaurant operators continue to execute at a very high level, driving solid restaurant profitability on healthy AUV, in both North America and across international. In our company own restaurant segment, margins were relatively consistent with the first quarter, but down slightly versus Q2 2020, reflecting higher commodity and labor related costs. Continuing with the P&L, on a GAAP basis we recorded a loss per diluted share of $2.30 in Q2. This included one-time costs $3.15 per diluted share related to the repurchase and conversion of the Series B preferred stock, which I just discussed. In addition, we incurred net cost of 3.3 million pre-tax or $0.08 per diluted share post tax related to our strategic corporate reorganization and new Atlanta office plans, we announced in September 2020. Excluding these special items, adjusted earnings per diluted share grew from $0.48 a year ago to $0.93 cents in Q2. For the remainder of the year, we are on track for the cumulative one-time costs related to the corporate reorganization to be with that our previously communicated range of $15 million to $20 million. As we said, we see these costs as an investment in both the company’s innovation and top line growth, as well as in our long term property efficiencies. Now, I’d like to turn to our cash flow and balance sheet, strong earnings again contributed to a dramatic increase in cash flow from operations in Q2, from $54 million a year ago to $65 million.
Free cash flow in the first half of the year rose to $100 million versus $67 million in 2020. We ended Q2, with net debt of only $329 million, up $54 million from a year ago, reflecting cash and liquidity used to fund the Series B retirement, mostly offset by free cash flow. During the second quarter, we paid a cash dividend of $10.4 million to our common and preferred shareholders. Subsequent to the end of the second quarter on August 3, our board of directors declared third quarter cash dividends of approximately $12.8 million to be paid to common shareholders. The third quarter common fact dividend is $0.35 per common share in line with the dividend increase, I just described. In the second quarter, we opportunistically repurchase 68,000 shares of common stock for $6.9 million, or $101.20 per share, under our previously announced $75 million share repurchase authorization. To the end of Q2, a total of 116,000 shares have been repurchased under this authorization, with an aggregate cost of $10.9 million, and an average price of $94.24 per share. I’d like to wrap-up by adding a few points to Rob’s comments on our goals and outlooks. Based on our strong sales and operational momentum so far in 2021 we feel confident about delivering low mid single digit positive cost of growth in North America, in the second half of this year. We are also raising our outlook for unit growth to 220 to 260 net new units in fiscal 2021. In the second half of the year we expect to continue to deliver a year over year margin improvement as we saw in the first half, though slightly moderated by three anticipated factors. First, we expect commodity and labor headwinds to continue in the near term. Second, Q4 will last the end of temporary franchise support last year so we will not have that you over year benefit. And third, in Q4, we will also incur expenses for annual franchisee conference, which was not held last year due to the pandemic.
On a sequential basis, I’d remind you that margins in the second half of the year are typically lower than the first half due seasonality in demand and input costs, reflect a similar pattern this year, as well as the impact of the factors, I just mentioned. On a full year basis in fiscal 2021, we expect to deliver operating margin improvement. between 200 basis points and 300 basis points over fiscal 2020, 5.2%.For the longer term we are well positioned to continue to drive margin expansion. This year we remain on track for annual capital expenditures of $55 million to $75 million focused on new store development, as well as new technology and productivity enhancements in our restaurants across the system. I want to close by saying how very proud I am of the progress of Papa John’s team has made, unlocking the brand’s growth and delivering long term value for our shareholders. We are very excited about our future, and look forward to updating you on upcoming calls.
I’ll now turn the call back over to Rob for some final comments, Rob.
Rob Lynch — President and Chief Executive Officer
Thanks Ann. For another quarter I couldn’t be more proud of our team and what we’re achieving, as I said last quarter was a milestone for Papa John’s on a journey of transformation that began two years ago. We’re in a very different position today, as demonstrated by 33% to year comparable sales growth in North America, and 27%, internationally, and by record unit growth in the first half of this year. But the strategy, values and mission behind that growth hasn’t changed. This is what gives us all such confidence in the sustainability of our progress and optimism about Papa John’s long term outlook.
With that, I’ll turn the call over to the operator for Q&A.
Questions and Answers:
Operator
[Operator Instructions] Our first question comes from the line of Alex Slagle from Jefferies. Your line is now open.
Alex Slagle — Jefferies — Analyst
Thanks. Good morning and congrats. With your new North American values now 33% plus 19, and I guess even more growth ahead. Just wante to get your latest thoughts on your potential need to add additional quality control centers in the next couple of years and then separately at the store level, just very happy with the current levels of execution and speed in the restaurants and with the delivery times and there’s anything you’d like to simplify or speed up or sort of other ways we can further leverage technology or best practices to kind of materially step that up further?
Rob Lynch — President and Chief Executive Officer
Hi Alex. This is Rob, thanks for the question. We actually have a fair amount of capacity, remaining at our Qcc. We had built capacity prior to call it 2018. And then with the change in the run rates on the business, we had a lot of excess capacity which made the supply chain less efficient, as the volumes get increased our supply chain has gotten a lot more efficient, creating a lot of value for both us and our franchisees as our cost structure has improved because of the leverage and the fixed cost coverage, so we’re in great shape right now from a supply chain standpoint, we don’t anticipate any large capital investments necessary to continue to support this rate of growth. In regards to the restaurant, we are investing a lot in the restaurants. I mean over the last two years, we’ve made significant investments into our company restaurants and have brought our franchisees along. If you recall, we invested in a couple pieces of equipment spinners and sheeters, which are ways for us to make our dough and pound out our dough much easier and faster, which has increased our throughput, allowed us to be able to service these increased unit volumes and then we’ve also invested in things like Papa call, which allow us to make sure that we answer every call, a big problem in the business model used to be on a Friday night and you get busy. You’re putting people on hold and you lose those calls. We now have a call center that answers every one of those calls and no calls get dropped and allows our team members of the restaurants to be able to focus on making pizza. But we are looking at a lot of technology investments, ways to optimize our delivery capabilities, ways to optimize how our — how we interact with our customers. And, you know, we’re looking at automation and a lot of other things that continue to increase productivity, and help us mitigate some of these challenges that we’re seeing in the current business dynamic.
Alex Slagle — Jefferies — Analyst
Thank you for that.
Rob Lynch — President and Chief Executive Officer
Thank you.
Operator
Thank you. Our next question comes from the line of Eric Gonzalez from KeyBanc. Your line is now open.
Eric Gonzalez — KeyBanc — Analyst
Hey, thanks for the question. Congrats on the really strong development numbers in the first half of the year, it really looks like you’re on a nice trajectory in terms of salary net growth and this straight goods service agreement seems like it’s a major step in that direction. So, should we expect to see more of these types of partnerships in the month ahead and do anything in the pipeline that you’re excited about, or anything you could share on that front. And that is regarding your development outlook, can you split that out between North American International and with the uptick in your guidance how much of that is driven by US versus International. Thanks.
Rob Lynch — President and Chief Executive Officer
So on your first question yes, we do have a lot of conversations happening right now, both with domestic and international current and prospective franchisees. We’re not going to disclose specifically, what that means in terms of unit numbers going forward but what I can tell you is that two years ago, almost none of our domestic franchisees were talking about development. And now, almost all of them are. And if you recall, last year we talked a lot about building the infrastructure to support sustainable significant amount of unit growth as part of one of our key initiatives, and we built that infrastructure. Last year we didn’t build a lot of restaurants because we were busy making sure that we have the tools that we needed to significantly increase, not just the number of restaurants that we were building, but the number of net new restaurants. I want to make sure that the units are going into the right places and are successful. I think, you know this brand had fallen a little bit into behavior where we opened a fair amount of restaurants, but we’d also close a lot of restaurants, with the improved unit volumes as well as our ability to identify better sites in real estate and help our franchisees, set up restaurants where it hits, spending a lot less closures moving forward, which will allow us to sustain high unit growth on an ongoing basis. So development is something that — in Q1 we talked about we were a little bit surprised by how many record units we opened in Q1. We thought maybe it was a little bit of a lag from the pandemic, but that has continued and we’re actually building momentum. So our color that we gave today in the 220 to 260 range is indicative of what we think we can do on an ongoing basis.
Eric Gonzalez — KeyBanc — Analyst
And the split between international and domestic, any color you can give on that?
Rob Lynch — President and Chief Executive Officer
Right now, International is accounting for about 80% of the new unit growth this year. We think that that is about the ratio and we’re looking for on an ongoing basis. We have a lot of white space globally. We operate in almost, right around 50 countries where our largest competitors are in over 100 countries. So we think that global unit development will be the biggest driver of our overall unit development but domestic development is absolutely accelerating, primarily with our franchisees, but we’re also building some restaurants. We’re going to open up some of our first company restaurants and a long time here in Q3 and we’re excited about leveraging that strategy to give our franchisees insights into how they can fill in their markets in a productive and profitable way.
Eric Gonzalez — KeyBanc — Analyst
Thanks and congrats again.
Rob Lynch — President and Chief Executive Officer
Thanks.
Operator
Thank you. Our next question comes from the line of Peter Sala from BTIG. Your line is now open.
Peter Sala — BTIG — Analyst
Great. Thanks. Thanks for taking the question, Rob, I want to ask about the same store sales outlook. You guys gave low-single to mid-single-digit same-store sales growth. Has that contemplated any impact from the new variant, are you seeing any sort of impact from that? I recognize, it’s early days, but any sort of changes in consumer behavior as that variant has spread a little bit.
Rob Lynch — President and Chief Executive Officer
No. Peter, it’s a great question. We have been very diligent in trying to get granular on the impact of the pandemic on our sales, obviously in Q2 and Q3 last year we had a huge surge in business, and that was primarily the result of the pandemic and the dynamics associated with that. But over this year, as we’ve seen market open up to a large extent, we haven’t seen a lot of drop off in our business. So, we measure every market very closely to try to assess what the impact is going to be when things kind of “get back to normal” and so when the delta variant came into play we were measuring those markets as well. We’re just not seeing a significant disparity between open and kind of more restrictive market. So that’s what gives us a lot of confidence that when we do come out of this whole scenario in this dynamic, then we’re going to be able to continue on the loyalty members and the amount of digital orders that we get allow us to track very closely, the behaviors of our customers, and we’ve been able to retain the customers that we brought in during the pandemic. And with the launch of Epic Stuffed Crust, we’ve drawn a lot of really heavy PC users in this category. And we’re seeing their frequencies and their ticket, higher than what we’ve seen in the past. So all of that gives us confidence, that regardless of what the pandemic situation looks like as we move forward, we’re going to be able to continue strong — to deliver strong results.
Peter Sala — BTIG — Analyst
Great. Thanks for that. And then just on the labor market. I know there have been many states — about half the states, maybe even more at this point, that have canceled or eliminated the federal unemployment benefits. Has that had any impact on your ability to hire or is the labor market in those states still pretty tough as well.
Rob Lynch — President and Chief Executive Officer
The labor markets are tough everywhere. We have seen a little bit of an improvement in application flow and hiring over the last two months, as some of the states have changed their policies, but it’s still a challenge. So, what I can tell you is that we have been able to mitigate some of that labor challenge by utilizing our partnerships with the aggregators. We have — in markets where we’ve had a real tough time, particularly finding drivers, we’ve been able to offload some of our orders to our aggregator partners, which has really helped us to be able to deliver the kind of customer service that we needed in the areas where we just haven’t been able to hire enough drivers. So that’s been a really helpful part of our partnership with the aggregators.
Peter Sala — BTIG — Analyst
Great. And congrats on the quarter.
Rob Lynch — President and Chief Executive Officer
Thank you, Peter.
Operator
Thank you. Our next question comes from the line of Lauren Silberman from Credit Suisse. Your line is now open.
Lauren Silberman — Credit Suisse — Analyst
Thank you so much and congrats. Well, it’s great to hear about all the interest from the franchisees. Rob, in your conversations with new franchisees, how do they look at the investment opportunity at Papa John’s perhaps versus and other franchise brands? And then, in your conversations with current franchisees. Can you expand on what you’re hearing from them, and how interested they are in growing in existing and taking fill-in opportunities versus expanding into new markets?
Rob Lynch — President and Chief Executive Officer
Thanks, Lauren. New franchisees are really excited about Papa John’s — the opportunity of Papa John’s for a lot of reasons. One is, frankly, there just aren’t a lot of opportunities at other national beef suppliers, so if they want to be in the pizza business and today they’re the sandwich business or some other QSR concept, Domino’s and Pizza Hut, have a lot of restaurants and most of their territories are accounted for. We have about half the number of units than our larger competitors, so there’s a lot more whitespace that we can develop and so for franchisees that want to be in the pizza business, we’re the best option. And with the unit economics, the unit economics that we’re delivering and the flow through that we’re seeing from the growth in the top line and then the productivity, we’ve been able to create in a supply chain, our EBITDA margins are as high as they’ve ever been at the restaurant level. So really excited about the level of interest in the new — in the prospective franchisee marketplace and we’ll be bringing more of that context and information here over the next couple quarters, as we close some of these deals. In the current franchisees, as I referenced earlier, what, two years ago, almost none of our franchisees — top 25 franchisees had development agreements in place, and almost none of them were building. Today, we’re having conversations with all of them, and we’re going into each of their respective market, and we’re leveraging the analytical tools that we build, to really find the opportunities for them to go in and build in their current market and create more saturation there which will allow us to reduce drive times, which will allow us to provide better customer service, and allow us to you know take share those markets. So there’s a lot of excitement, both with prospective franchisees as well as our current franchisees.
Lauren Silberman — Credit Suisse — Analyst
Great. And if I guess, you’ll follow-up on the universe guides, 220 to 250 net new in this year now near historic levels, as you look out over the next few years, any color on how you see that continue to ramp up, in terms of magnitude.
Rob Lynch — President and Chief Executive Officer
Lauren, I am sorry, I know a little bit of trouble here, can you just repeat that question?
Lauren Silberman — Credit Suisse — Analyst
Sure. So on the net-new units so 200 to 250, is pretty much at historical levels. So as you look over the next few years, any color on, how you see that ramping up in terms of magnitude?
Rob Lynch — President and Chief Executive Officer
Yeah. I think there’s a definite way, an opportunity for us to increase that run rate. We still have a lot of untapped markets, internationally. We have and frankly and we’re underdeveloped in markets that were already in, like China, and even in the UK our largest international market. So, we would be looking to continue to grow, the number of restaurants that we’re able to open up over the foreseeable future.
Lauren Silberman — Credit Suisse — Analyst
Great. Thank you so much.
Rob Lynch — President and Chief Executive Officer
Thank you.
Operator
Thank you. Our next question comes from the line of Alton Stump from Longbow Research. Your line is now open.
Alton Stump — Longbow Research — Analyst
Good. Thank you. Good morning, I just wanted to ask labor front Rob here in the US, I would presume that the tight labor market is planning it difficult to open new stores, kind of how do you see the pace of that playing out over the rest of the year, quickly as we move into the fall where hopefully we’ll see a bit of a loosening of labor market and could help to drive an acceleration in growth here in the U.S. and in the France?
Rob Lynch — President and Chief Executive Officer
Yeah. Absolutely, I mean, we believe, we would hire as many people as we find right now. The market tight labor markets are absolutely a part of the construction of our ability to deliver the kind of customer services and we’re hoping to deliver. We have high operational standards and I think our operation has done a great job throughout the pandemic, and through the tight labor markets. But I think if the labor markets open up, it will afford all of these delivery companies, the ability to deliver better customer service and therefore, even increase the throughput and contribute to our growth ongoing.
Alton Stump — Longbow Research — Analyst
Great. Thanks so much
Rob Lynch — President and Chief Executive Officer
Thank you, Alton.
Operator
Thank you. Our next question comes from a line of Dennis Geiger from UBS. Your line is now open.
Dennis Geiger — UBS — Analyst
Great. Thank you. Rob, I wanted to ask first about the market share gains that you’ve seen? And if you have any sense on kind of where that’s been coming from for the last many quarters? Is it coming from sort of the larger brand? Is it coming from the independent pizza chains? Are they’re just continuing to be more pizza category occasions? Do you have a sense for and curious how you see that opportunity going forward. I’m sure it’ll take share wherever you can get it, but just if there’s any thoughts from you on that front?
Rob Lynch — President and Chief Executive Officer
Yeah. I think our business growth has come from a lot of different places, not even just in the pizza industry, I mean, excuse me, as we’ve looked at the business. We haven’t been now coming hopefully out of a pandemic. A lot of our businesses are has been driven by a shift from going obviously dynamics to delivery and e-commerce, and last mile delivery we’re going to be continued to be consumer behaviors and dynamics that we think benefits on an ongoing basis, but within the pizza market and industry we’ve seen that — we’ve taken share from almost everybody. As you know our cost sales have grown faster than our competitors. Obviously, we’re driving dollar share. And then I think the predominant has come from the mom and pops more so than the national chain, but I think we’ve been able to grow faster than most people in the marketplace.
Dennis Geiger — UBS — Analyst
Got it. And then maybe just one more, as it relates to anything else you can share on sort of the exciting new customer acquisition and retention that you highlighted, anything additional on those new customers on that you’ve acquired relative to their purchase behaviors. I think you’d call that Epic Stuffed Crust. But beyond that any other initiatives or opportunities that are kind of most critical to retaining and kind of continuing to attract those new customers. Thanks.
Rob Lynch — President and Chief Executive Officer
Yeah, I mean we have a robust innovation pipeline that we’re going to continue to launch. It’s been really exciting to see how this innovation pipeline has rolled out. We — the model that necessarily employed Arby’s or Taco Bell my previous life well, we are pumping things out every month, I mean, this is more of a foundational innovation platform that we continue to launch. Epic Stuffed Crust the Papadias, and these aren’t going anywhere. So they brought in a lot of customers, it did have a higher tickets, because a lot of this is additive, right. This used to be a traditional pizza transaction now as a — adding $3 more for Stuffed Crust, adding $6 more for Papadias, so our tickets growth is going up dramatically, without us having to take really any pricing on our core items are increasing our delivery fee. So that’s really incremental to our business and that’s how we’re thinking about the innovation pipeline moving forward and we’ve got a lot of stuff that is ready to roll out here in the back half of 2021 and it’s 2022.
Dennis Geiger — UBS — Analyst
Great. And congrats on the quarter.
Rob Lynch — President and Chief Executive Officer
Thank you.
Operator
Thank you. Our next question comes from the line of Brian Mullan from Deutsche Bank. Your line is now open.
Brian Mullan — Deutsche Bank — Analyst
Hey, thank you. Rob, just a follow-up to some of your comments to a prior question. In comparison to say about 6,500 Dominos units today and about 6,500 Pizzas give us today in North America. Is there a reason Papa John’s couldn’t get to that level one day, perhaps their leaves are too big or they’re too penetrated, or near shut out there, I don’t know, just wondering how you think about that long-term domestic potential, is there a ceiling we should be thinking about this in terms of…?
Rob Lynch — President and Chief Executive Officer
I got it.
Brian Mullan — Deutsche Bank — Analyst
Yes.
Rob Lynch — President and Chief Executive Officer
Brain, I think you nailed it. I mean that’s how I talk about it with our franchisees. That’s how I talk about it within our company, and the fact that Domino’s and Pizza have almost to X number of units and we do domestically. There’s no reason why we can’t get there as well. I think with this brand haven’t had a very strategic conservative development strategy in the past. We have a lot of onesie twosie franchisees, who came in, they could find a spot, they like that it wasn’t around another Papa John’s, you could open up Papa John’s. We had a lot of situations where restaurants were closing and people weren’t set up for success. Well, we spent the last 18 months doing is building a development capability that will be set up for success, both from the kind of franchisees that we’re looking for that are experienced and well-capitalized, but also the tools that we afford them in the forms of finding great real estate and construction capability. So we are very bullish on domestic development and our franchisees are really starting to, engage and we’re starting, development agreements right now. We just signed a development agreement with our largest privately owned franchisee this year the first development agreement he’s done in quite some time. And he’s very excited about it. We’ve got more lined up. So I would expect that our development pipeline, accelerate pretty dramatically here over the next 12 months to 18 months.
Brian Mullan — Deutsche Bank — Analyst
That’s great. And then just a follow-up. Can you talk about the business in China, maybe remind us how the business is doing, do you have the right unit format? How is the relationship with the partners? I think you’ve spoken to an ability to add 1,000 units there over time, is that a medium-term goal, because I would think it could be even more than that, over the long-term. So just wondering if you could update us on that market?
Rob Lynch — President and Chief Executive Officer
Yes. I mean, China is a huge opportunity. As you know our competitors have very developed with us a very. And we have about 200 units there. The problem is similar to kind of the dynamic I just shared with you. We continue to open units but a lot of them closed. So we’re working with our Chinese partners to really build a model that’s going to be able to sustain growth ongoing and keep up, not just opening new restaurants, but keep them open and help those franchisees be successful on an ongoing basis. So there’s no reason why we can’t get to 1,000 units in terms of the time horizon on that, depends on what you call with tariffs, mid-term or long-term, but we think that that’s what really achievable.
Brian Mullan — Deutsche Bank — Analyst
Thank you.
Operator
Thank you. Our next question comes from the line of Brett Levy from MKM Partners. Your line is now open.
Brett Levy — MKM Partners — Analyst
Great. Thanks for the call. Thanks for taking my question. Just — first couple of clarifications. Did you say, low, mid single-digits, does that mean the bottom half of the four to six, it’s not low single-digit and mid single-digit? And then also, you’ve talked about the improving profitability and the unit economics. Care to share anything in terms of either absolute restaurant level EBITDA for your franchisees? Or just magnitude of increases that you’re seeing there? And then just finally, on the labor front. You obviously had a successful year you guys were among the earlier to go out and hire, and you’ve continued to supplement that. What are you seeing in terms of your retention, your turnover? How much of this hiring is proactive to just help support the growth that you have and how much of it is a need to just keep everything afloat? Thanks.
Rob Lynch — President and Chief Executive Officer
So on your first question regarding low to mid, I think that you’re thinking about it the right way. That’s about how we’re thinking about it. You know, the definition of low, the definition of mid, the definition of high, I think, have [Technical Issues]. So I think you’re thinking about it the right way. In terms of EBITDA percentage of the unit level when we don’t disclose that information for company or our franchise restaurants. So we’re not going to be able to give you an exact EBITDA percentage margin rate. But on the labor side, I think it’s both. I think we’re definitely challenged. It’s a — QSR is a — is a low, minimum wage business and anytime you’re competing for entry level workers and minimum wage workers, you’re going to have a lot of turnover. You know we tried to do things that will help us to retain those workers. We’ve leave off — we offer now telehealth to everyone in our system. We have free college benefits. So our goal is really to be the employer of choice in this marketplace and be able to increase retention, across our hourly workforce. In terms of our salary workforce that our general managers that are above restaurant level management, we’ve had strong retention. We haven’t seen a significantly higher amount of turnover despite the labor challenges. And you know I think part of that is the success of the restaurant where the restaurants are making — driving sales, high sales. Our managers are making good salaries and bonuses and so we tried to do everything we can to increase retention and we’ve been pretty happy despite the challenges that everyone has faced across the labor market as industry.
Operator
[Operator Instructions] Our next question comes from the line of Chris O’Cull from Stifel. Your line is now open.
Patrick Keeley — Stifel — Analyst
Great. Good morning guys. This is Patrick on for Chris. I just wanted to touch a little bit on what you’re seeing in terms of day parts or occasions without SAS contract that you’ve seen and particularly if there’s an outsize portion of that coming from any particular time of day, under the poverty platform in addition to being an add on has boosted the lunch business that you mentioned in the past, but also you know with the return of sports and just general return of consumer mobility, I’m wondering if you’re seeing large party ordering, coming back to maybe pre-COVID frequency levels or something approaching that? Thanks.
Rob Lynch — President and Chief Executive Officer
Thanks, Patrick. Yeah, we haven’t seen a significant shift in day part. The launch of Papadias was intended to go and compete for that launch day part with sandwiches and we started seeing some movements there and some traction there prior to the pandemic and then obviously, people started working from home and that whole dynamic shifted. But really what we’ve seen is just outpaced share growth, early dinner and later dinner day part. Now in terms of the large size orders, we hit a lot of that — happened with the sports and then we’re looking at the Q3 and thinking that’s going to be a return to that. We haven’t seen quite the return that you had with the football season is coming up and then I think back to school this year hopefully, a lot of our operators service a lot of schools and kids head back to school this year, you also see a pickup in an average price per order that we — a bit more we’re returning to where we weren’t before.
Operator
Thank you. Our next question comes from the line of Andrew Strelzik from BMO. Your line is now open.
Andrew Strelzik — BMO — Analyst
Great. Thanks. Good morning. I was just hoping you could give some color on what you’re seeing internationally in terms of consumer behavior and the drivers of the strong growth there. The operating environment seems like, it’s been pretty volatile with restrictions and the changes there, so would just love to get your perspective on what you’re seeing in your key markets internationally? Thanks.
Rob Lynch — President and Chief Executive Officer
Yeah, I say, almost all our markets open back up. The markets that we operate in have actually stayed open through the Delta variant. UK is our largest international market and UK have been strongest international market, but parts of South America has been a basic fluid, Tilray has been a great market for us over the last year, but Peru has been up and down with its closures and restrictions. The Middle East obviously has had some — some variability, as they’ve closed and put in curfews. But overall, I’m really seeing strong performance, globally, and the biggest challenge we’ve seen has been, I think in Russia, with some of the uncertainty there and how they handled the pandemic. But across the globe we’re back operating and performing at a high level.
Operator
Thank you. Our next question comes from the line of Brian Bittner from Oppenheimer & Company. Your line is now open.
Brian Bittner — Oppenheimer & Company — Analyst
Thanks. Good morning. Just a big picture question, and then I do have a quick follow-up on the — on the guidance. Bigger picture, these company owned a AUVs are about 25%, 30% higher than your franchise system AUVs in North America. Can you just walk through what the main drivers of this difference is between the two businesses? Or the company owned stores just in better markets or do you believe they actually represents some type of upside where the franchise AUVs could go as you potentially close that gap?
Rob Lynch — President and Chief Executive Officer
Yeah, I think — I think it’s a little bit of both. I mean, obviously, as the company has sold off market, the market that were sold off will probably below the formal markets — in the market that were held on to were better performing markets. So, our company footprint is kind of in our — kind of bull’s eyes, where the brand started really in the Midwest, down through the southeast. And so those markets really performed well for us, as opposed to the — the east and west coast now throughout the pandemic, with some of our markets have been those coastal cities. New York City was one of our fastest growing markets as well as kind of the west coast so we’re starting to see — having discussion that actually see some development, excitement, taking place in those markets. So, I think it really is a function of kind of the — the penetration of the company markets relative to the franchisee markets. Now — as those — as we build more restaurants into those markets and that generates more marketing dollars. I think you’ll be able to, we’ll see more of a balance between company and franchise AUVs.
Brian Bittner — Oppenheimer & Company — Analyst
Great. And the follow-up on the gains is on the back half same-stores sales guidance still very impressive low mid single digits, given what you achieved last year. It does suggest a softening in the two year trend that you’ve been executing in the first half that you’ve been referencing in the first half. So is there something you’re specifically seeing in the business or the industry that would drive that change and kind of the two year trends in the business or is there some dose of conservatism built into the outlook just because of how strong your first half was? And the menu innovation in the first half was?
Rob Lynch — President and Chief Executive Officer
Yeah. I would say, really, it’s driven by, we have a stronger back half of 2019 — from about 2019 So, our costs last year in the back half particularly in Q4 were lower than our costs in Q2, Q3, because we’re talking about a number. So, if you recall back in the first half of 2019, the brand was really struggling, Q1 2019 minus 7%, Q2 2019 minus 6%. So as we comp those in Q1 2020, we kind of had, just call what it is, easier comps, we’re getting into some tougher comps now in the back half, but we’re very excited — to continued sales momentum, I mean our PSA in the back half are relatively consistent in the format, so except in Q3 where we have some seasonal decline every year in Q3 and obviously our lowest sales quarter. But I wouldn’t say that we’re making a conservatism, I say we’ll see a bit of a sequential slowdown in comps, I mean, I don’t think that you should be planning for 33% to your cost on an ongoing basis. So, we will see two years comps slowdown, but we’re still — our goal is always to outperform the industry at large and we think that we can continue to do that.
Brian Bittner — Oppenheimer & Company — Analyst
Thank you
Rob Lynch — President and Chief Executive Officer
Thanks Brian
Operator
Thank you. Our next question comes from a line of James Rutherford from Stephens Inc. Your line is now open.
James Rutherford — Stephens Inc — Analyst
Great, thanks for getting me in, I wanted to ask Rob on the company store opportunity, you previously guided to opening 20 to 30 net new company locations this year if I got that correct, clearly you’re sitting on a lot of companies stores and AUVs that you just talked about, quite a bit higher than the average franchise location. What are your thoughts toward re-franchising a portion of those to incentivize some of these big operators out there to get into the system and kind of put a stake in the ground with big development agreements? Thank you.
Rob Lynch — President and Chief Executive Officer
Yeah, great question. We’ve talked a lot about that over the last several years, and I think our answers is pretty consistent, I mean when we see opportunities to do that, and I haven’t had a bunch of new franchise a year, or even a current franchise was to develop a market at scale, we’re absolutely willing to look at divestiture of some of our portfolio. So we, we’ve maintained optionality for — throughout the last two years in regards to filling in markets, building restaurants, but also selling restaurants that the opportunity presents itself, but we’re absolutely not selling restaurants just to sell them, there has to be transaction that has to come along with a big development agreement, and we’re in some of those discussions right now.
James Rutherford — Stephens Inc — Analyst
Great. Thank you.
Operator
Thank you. Our next question comes from the line of Todd Brooks from C.L. King & Associates. Your line is now open.
Todd Brooks — C.L. King & Associates — Analyst
Hey, good morning everybody. Just a quick question, if you’re looking at the back half outlook, can you talk, I guess your inflation outlook as far as maybe key commodity classes or labor where you’re expecting to see inflationary pressures maybe accelerate, and Rob you touched on pricing that the company has achieved, kind of, ticket gains with new product introductions, but then you thought that the brand has real pricing power, can we just talk about thoughts on what you would need to see that maybe pull the pricing lever here and back half as well across, maybe some of the broader product portfolio. Thanks.
Rob Lynch — President and Chief Executive Officer
Sure. I’ll let Ann speak to kind of our perspective on inflation, and that I can give you some color on — our thoughts on pricing.
Ann Gugino — Chief Financial Officer
Yeah. So we are, as it relates to specifics on the back half, we continue to expect some margin pressure on the food basket, there will be favourability in cheese because it was very high last year. However, that’ll be more than offset by inflation that we’re seeing in other categories like soybean oil, yeast, [Indecipherable] in the boxes. So in total, we are expecting to see some — on the food cost in the back half of the year. Similar story with labor, just as we’ve been talking about the tightening market and competing for talent. But I think the thing I would highlight is, well we will see some pressure and our margins come down from the first half, we still expect year-over-year to continue to improve margins.
Rob Lynch — President and Chief Executive Officer
So if we do see significant inflation and we need to pull the trigger on pricing, we feel confident that we’ll be able to do that. We’ve held off on that. I mean, when we kind of kicked off this thing two years ago, one of the biggest challenges we had is that our value perception relative to our competitors was way off. And so, over the last two years, we have been very focused on driving growth through innovation versus driving ticket growth through pricing. So we’ve taken almost no pricing. And I think that that has helped to reset our value perception relative to our competitive debt and balance that a little bit. And so as we move forward, if we can continue to deliver innovation to consumer self selected and that mitigates the impact of inflation, we’ll continue to do that. But we’re also testing multiple different scenarios where we could potentially take pricing, some of our items through some delivery fees or other ways to mitigate the cost of — the increased cost. So we’ll be prepared either way.
Todd Brooks — C.L. King & Associates — Analyst
Great. Thanks Rob.
Rob Lynch — President and Chief Executive Officer
Thank you.
Operator
Thank you. At this time, I’m showing no further questions. I would like to turn the call back over to Rob Lynch for any closing remarks.
Rob Lynch — President and Chief Executive Officer
Well, thanks everybody for joining us today and for your great questions this morning. We really hope that you are as excited about the future of Papa John’s as we are. Obviously, the comp sales growth has been an ongoing story, but I think the really big news here today is the development growth. The development and franchisees willingness to invest capital into a system is one of the biggest indications of the health of that system. And we’ve been promising it for quite some time and we feel like we are on the cusp of delivering some really outpaced development growth. So we’re really excited. We hope you’re excited as we are I hope and wish that all of you stay safe and wish you all well. I look forward to talking to you again soon. Thank you very much.
Operator
[Operator Closing Remarks]