Good morning, everyone. I'm Brian Mullan, restaurant food distribution analyst at Piper Sandler. We have Rob Lynch, CEO of Papa John's , Ravi Thanawala, CFO. Thanks for being here. You guys put out a pretty comprehensive press release yesterday. There's a lot to go through this morning. You know, hoping we could start with the changes announced to the National Marketing Fund, as well as making local marketing optional for franchisees. Rob, maybe you could just take everyone through the changes, and what are you hoping to accomplish with this?
Sure. Thanks, Brian, and thanks to ICR for having us, giving us this platform to introduce all this good news that we have to share. So yesterday, obviously, we put out a lot of information. We wanted to make sure that we got it as it's hot off the presses. We've spent the last six months working with our franchisees in North America to really develop some transformational change in our system. You know, we're always looking to make our franchisees more profitable. Obviously, unit economics are the heart and soul of every system. When franchisees are making money, they wanna build more restaurants, and that's the healthiest indicator, the biggest indicator of a brand's health.
As we look at our franchisees' P&Ls relative to a lot of our competitors, the one thing that always stood out to me that, you know, impacted our ability to deliver best-in-class restaurant margins was the marketing expenditure, frankly. For those of you that don't know, we have had, for the last about 10 years, an 8% required marketing spend at Papa Johns. And for those of you that, probably everyone, you know, studies the industry, that's, that's about as high as it gets. And that makeup of marketing was spent at the 5% national rate and 3% local. Most other national-scaled brands have moved away from the co-op model and the local marketing model for the, productivity that is garnered by leveraging the national media platform.
You can buy at scale, you can get better rates, you get access to better programming. It also allows you to put more working dollars up against media versus having to spend non-working dollars up against agencies in every specific market. So we worked with our franchisees to deliver a change to our system that we have locked in for six years that will move away from local marketing. We no longer require our franchisees to spend local marketing, and so the total effective rate goes from 8% to 6% for required marketing. So an opportunity to pick up 200 basis points of margin at the restaurant level, with a bigger impact from the marketing. I think, you know, most of you probably know our national marketing, obviously, you get more productivity than your local marketing.
We are expecting a pretty significant increase in our return on advertising spend. So before we even add a dollar, we're gonna get more effectiveness from moving to local to national. But we also just conducted, in concurrent with this whole process of working with our franchisees, an agency review, a media agency review, and we are bringing on a new media agency that we believe will also contribute to increased productivity and effectiveness of our media. And so moving from 8%-6% will actually have more of a sales-driving, positive effect while adding 200 basis points to our franchisees' PNLs. So that's, that's it in short order.
Okay, thanks, Rob. You know, your algorithm, you're usually targeting +2 to +4 domestic comps. You finished off Q4 on a positive note. In terms of 2024, would these changes, maybe an obvious question, but is this a tailwind for comps? What's your confidence this year in terms of hitting the algo on the comp side?
Yeah. So our long-term comp guide is 2%-4%. We believe that we can deliver within that range in 2024. This change gives us even greater confidence in our ability to accelerate comps year-over-year. So this year, we announced yesterday, that we finished, plus one percent for 2023, plus two percent for Q4. So we're seeing strong momentum. We finished up 3% in Q3. So we had a strong back half to the year, and that's before this implementation of incremental marketing, goes into place. So we have a lot of confidence in our ability to continue to accelerate comps in North America into 2024.
Okay. So another big item from the release yesterday was an introduction of new development incentives, for franchisees in North America. Maybe take everyone through the details on that. How are you expecting the existing franchisees to respond? Are you expecting to see a pickup in demand from outside franchisees?
Yeah. So if I may, I might take a quick step back and talk about what we announced yesterday was phase 2.0 of our Back to Better initiative. Back to Better 1.0 was making sure that we had the best operations in the industry, and last year, we were ranked number one in customer service. We've taken our out-the-door times at our company restaurants from 28 minutes a year ago to 19 minutes today. So transformational change in our operations, big improvements running our restaurants. When you know that you're running great operations, you can pour fuel on the fire and know that you're gonna get the return on that investment. So Back to Better 2.0 is all about, holistically, it's about driving comps, which drives profitability, and driving development, which also drives profitability for our system.
As we build more stores, we create more volume in our supply chain that drives costs down at every store. So Back to Better 2.0 is really a three-legged stool. It's the marketing investment. It's the development incentive, which I'll speak to in detail, but it's also the changes that we've made to our supply chain model. One of the challenges with our business model since I've gotten here has been that half of our revenue comes from our supply chain, which was fixed at a 4% margin. Over the next four years, we will take that 4% up to 8%, okay?
The big, you know, the big watch out there, and I think this, this came because we weren't able to provide holistic context about the marketing and the development, is that, you know, if we are charging more, our franchisees get less profitable. But when you combine the marketing improvement of 200 basis points and you throw in the supply chain, which has the potential to add 100 basis points of cost, net-net, margins are getting better, and we've resolved a core issue with our business model for the long term. So we felt great about the whole platform of Back to Better 2.0, which is all three of those components, okay? The development incentive. We've just announced the largest development incentive in the brand's history, and it's a, it's a unique development incentive.
Typically, when a brand offers a development incentive to their franchisees, it's usually royalty-based or some other P&L expenditure-based incentive. So to incent the franchisees to build, it costs the franchisor money. This incentive is not royalty-based, it's marketing-based, okay? So for every new store that is built in 2024, those stores will not have the obligation to pay into the National Marketing Fund. So they will receive 600. And that's for a five-year term. They will receive 600 basis points of flow-through in their restaurant P&Ls. So think about franchisee restaurant making 15% EBITDA margins. Every restaurant that is built in this year would move up to a 21% EBITDA margin, and that's before the marketing benefit of the 200 basis points.
So these restaurants built this year will be the most profitable restaurants in our system for our franchisees. Why doesn't that cost us, the franchisor, anything? Because we've built it in a way that these, you know, these restaurants won't fund the marketing fund. Why is that okay? Because of our new marketing model, which is adding $20 million to our marketing fund. On average, new restaurants contribute two to four, depending on how many we build domestically, $2 million-$4 million of incremental marketing. We just added $20 million of incremental marketing. So we have no concern over the next year of not having that incremental contribution from the new restaurants, and so we can give that reprieve.
Over the next five years, as we build more restaurants, the marketing fund will continue to grow, and so we have confidence that those restaurants that are built this year will not have a negative impact on the marketing fund. So no P&L impact to us, incredible increase in franchisee profitability without having a negative impact on our marketing fund. So I know there's a lot there. Obviously, we're here meeting with everybody all day today, so we can get into detail, but it's really a unique model that isn't royalty-based, which I don't really believe in. We shouldn't have to pay our franchisees to do it. So that's where we netted out.
All right, thanks, Rob. And just, just to put a fine point on all this, when you announced the supply chain changes in November, is it right to think that you knew the marketing and the development was on the come? Maybe everyone in the investment community... Is that right? So this is and, and how is the franchisee receptivity?
Yeah, it was a holistic program that we were working towards, but we had to stagger the releases of the different components. And the reason why is because you know, doubling our supply chain model, which generates about $1 billion in revenue from 4% to 8%, is a material finding, you know, is material information that we had to disclose when we made that decision. The marketing incentive or the marketing change needed to be voted on by our franchisees in order to move forward. The vote was mid-December, so we had to stagger the announcements. But I'm happy to tell you, I mean, the move, the change in the marketing, was voted on by our franchisees. Over 90% of the system voted to increase and move marketing from local to national.
So not only is that a big improvement in our ability to drive the brand, it's also a vote of confidence from our system. Our franchisees right now are healthy, they're making money, and everything that we just announced will make them more profitable at a steady state. But everything we're doing is intended to drive more comps, more volume, which will increase their productivity because our supply chain will get more effective.
Okay, I'm gonna switch over to international. You know, a few separate items to touch on, I think. You know, maybe we could just start with the establishment. You announced regional hubs, as well as some increased technology investments. Can you just elaborate on what you're doing here? How long you think it'll take everything to get set up? And then, Ravi, maybe take us through what this might mean from a G&A perspective. Is there anything investors should be considering here? So kind of two-parter.
Okay, great. You know, I'm really proud of the fact that we operate in 50 countries. But the global environment has been anything but stable over the last, you know, four years, four and half years. I've been here four and half years years, and so there's a lot of volatility internationally. That being said, we continue to build lots of restaurants. We've built over 200 restaurants internationally in the last three years. And, you know, we're really proud of the fact that we have great franchisees in great markets. We're also excited about the fact that despite being in 50 countries - that's only half of what our two largest competitor, global competitors are in. So there's a huge amount of white space for Papa Johns, and every year we're adding three to six new countries.
So we're bringing on new partners, going into parts of the globe that we have not yet penetrated. And frankly, there's – we're not talking about small countries here. We're still not in Australia, we're not in Japan, we're not in Brazil. These are big, you know, highly populated, affluent countries that we have yet to go in and establish partnerships and build out. So a more white space for us than almost anywhere else. So the long-term development opportunity of Papa Johns is, I think, is best in class. In the short term, we need to make sure that the markets that we are already in are set up for long-term success. For a long term, this brand was focused on just opening restaurants.
We want to make sure that the restaurants that are open are operating at a high level, making money for their franchisees, making money for sub-franchisees, so that we can continue to grow and prosper together. So in 2024, we've talked about—in 2023 and then into 2024, we've talked about optimization of some of these markets. There will be some closures in some of these markets. We've full stop. That's strategic, that's intentional. Usually, when you hear about store closures, it's because, you know, it's because there's problems or what have you. We want to make sure that we have every restaurant in our system is set up for success. When you have a market. Let's talk about the U.K. The U.K. obviously has had its challenges over the last couple of years for a lot of reasons.
Some of our making, some of the macro situation. But we have restaurants there that are unprofitable. We own, we recently purchased a lot of restaurants in the UK, a non-cash transaction, but nonetheless, we purchased these restaurants because we had to, because we had to stabilize that market, and we had to get in and operate to really understand what that market needed. We have restaurants that we own that are unprofitable. There will be closures in 2024. Those closures will be profit accretive to Papa Johns, okay? And long term, our intention is not to own restaurants in the UK. Our intention is not to own restaurants internationally. It's a master franchise model. We love that model. So we stepped in where we had to, and we figured out what we need to do, and we're going to execute it in 2024.
So our intention in 2024 is to rightsize the UK market, which will be profit accretive to us, and to optimize the markets across the globe. And in order to do that, we've set up a new model. Our historical model has been that all of our global operations were run out of London. We are now embedding teams in the markets in which we operate and are going to grow. So we have built an APAC team, we've built a Europe and Middle East, Africa team, and we've built a Latin American team. So these teams will be comprised of operators, marketers, and tech, and they will be there to work with our franchisees to make sure that they are set up for long-term success.
Brian, from a G&A standpoint, our number one focus is making sure we're set up for long-term success in the international market, which means being close to the consumer, continuing to focus on menu innovation, and making sure we have the right insights to help our franchisees execute. As we think about G&A, productivity is always an objective. When we look at the value creation opportunity for the long term, we think getting our products and our restaurants at the right productivity levels across the world has to be the top priority, given we have such a robust future in terms of development opportunity.
So it does sound like there's some hiring and some technology investments. So just to kind of close out the point, are you just gonna start making those now, or have you-- are they already underway, is kind of-
They've been underway for, for a number of months. We believe we're at the point where we're starting to see the acceleration of that change happen. And as Rob talked about, in 2024, we are taking a number of actions, particularly in the U.K., to drive acceleration and accretion back in that model.
Yeah, and I just want to build on what Ravi said. There will not be a material G&A change.
Okay.
Okay, so we're evolving the model from being centralized to being in the markets. So, there will not be a material increase in G&A to do that.
Understood. And last one, the UK, do you, the optimization process, which you discussed, do you think, not asking for much, but do you think by the end of this year, that would be resolved, or is this, could this go longer?
It is a top priority. Ravi and I spend probably more time, have spent more time over the last six months focusing on this than we want to over the long term. So yeah, our intention is to optimize this market over the next 12 months.
Okay, understood. Last one on international here before pivot back to North America, but just same-store sales in the fourth quarter, they were, you know, down 6%. Maybe you could just speak to where the pressure was most acute and anything you could say on the outlook for 2024, if these pressures would persist or recede or, you know?
Yeah. The number one driver of the international comps in Q4 was the Middle East. Middle East is a big part of our model. We operate around 500 restaurants there. So it's about 20% of our total international footprint and one of our fastest-growing markets. So it is a very important part of our international future as well as our delivery in the present. So that is the big drag on the international sales. I wish I could say that, you know, 2024 was going to be better. I don't think anyone in here knows what the conflict in the Middle East is going to look like over the next 12 months. Obviously, we're all hoping and praying for resolution there, but as long as that persists, there'll continue to be volatility in our comp numbers.
But one of the things I want to make sure that comes out of this conversation is that with the white space that we have, the footprint that we have internationally, the long-term potential is great. The near-term impact is not as great. So, you know, our comp sales being internationally, in any individual market, whether it's the Middle East or China or even the U.K., is not a material enough impact for us not to be able to deliver on our earnings commitments. Our focus is on the domestic business right now and driving profitability through the domestic business. So we have all these things that we've talked about internationally. We're definitely mitigating these challenges. We're definitely optimizing the model moving forward, but where we are really gonna deliver in 2024 is on our domestic business, both on comp sales growth as well as new development.
It takes between three, and depending on which market, it takes between three and four international restaurants to equate the royalty stream from one restaurant domestically. So, you know, if we, if we are really driving our domestic business in the near term, that's going to be what drives our company. Long term, we need to build, you know, 2x, 3x the number of international restaurants, and we have the capability and white space to do that.
Okay, so pivoting back to North America, question on the third-party aggregator marketplaces. Company has had a lot of success here, early adopter over the last few years. You've grown despite other large pizza players joining. There is an additional prominent chain joining soon, as we all know. You know, do you think that will have any impact on Papa Johns in 2024, 2025? Or is this a situation maybe you think that the broader market is growing, and transactions can maybe grow for multiple players in that marketplace?
So as Ravi said, we consider ourselves the most consumer-based company in the space. Product innovation, we deliver what the customer wants, not what is necessarily just what we wanna make. From a technology standpoint, we make sure that we are where the customers are going. We made a strategic decision, literally, in the first month that I was in this seat, which hard to believe it was four and half years years ago now. I was sitting in San Francisco with the aggregators, and we made the strategic decision to integrate our business with each and every one of the aggregators. Some of those aren't around anymore, but, that decision helped us thrive during the pandemic when it was almost impossible to staff. That decision has helped us grow our business over these four and half years years.
Pizza Hut came in a year and a half ago. Little Caesars now uses DoorDash as their white label delivery service, so and has come into the, you know, the aggregator marketplace spaces. So despite huge amounts of competitive entry, we have continued to grow our business and grow our share of the aggregator business. So, you know, I know that our company has had a drag on it since Domino's came out and said that they were going to the aggregators. But I think we just beat expectations in Q4, despite them going into the aggregators. Now, they're they went to Uber only, are doing a lot of testing, so I know they don't have their model optimized, and they've talked about they're gonna come out and scale that, and that's great. But we have a four-and-a-half-year head start.
We know how to win in this channel. We are the market leader in this channel on a per store average, and we are fully integrated and fully from a technology standpoint, from a capability standpoint. We've also been able to strike the right balance between growing in the aggregator space while still thriving in our organic channels. We've continued to grow our loyalty platform while we've grown with the aggregators. We've continued to drive our carryout business while we've grown with the aggregators. So, we have struck the right balance, and we have a lot of confidence, as evidenced in Q4 and over the last four and a half years, that we can continue to thrive there despite large competitive entries.
Rob, you just referenced the loyalty program . I think on the last earnings call, you referenced or talked about an opportunity to maybe enhance that program, maybe better performance in 2024. So what's the roadmap, and can you elaborate on the plans on loyalty and your loyalty program ?
Yeah, I mean, we've got a great loyalty program. They're our, they're our best and most frequent, highest-ticket customers. We've gone from 12 million loyalty members when I got here, I think, to over 25 million loyalty members at this point. So we have a robust loyalty platform. It's not optimized, and I've been talking about loyalty optimization for a long time. It's a heavy lift in order to get the technology in place, but we are actively working on that. We have a new CMO, he's been in the job about eight months, comes from MOD Pizza, before that was at Chipotle, helped build the Chipotle loyalty platform. Like, we are focused on this. This is a big part of our technology spend. For those of you that don't know, we spend about $80 million in capital a year.
Half of that is technology. Like, we are a technology-first company. We 85% of our transactions come across our digital channels. We get 100% of our first-party purchase data. So we have huge amounts of data to mine. We have unbelievable number of transactions that we see every day. We're working on the technology to optimize, enrich that data, to make sure that we can most effectively target customers when and where, and with what products are most likely to drive a profitable transaction for our franchisees.
Okay, so we have, I think, under 30 seconds left, so maybe I'll just turn it over to both of you if you have any closing remarks or anything I didn't ask that you wanted to touch on.
Why don't you go first? 'Cause I've talked a lot.
Oh, we're really excited about Back to Better 2.0. We see it as a clear opportunity to drive system-wide sales, continue to drive restaurant profitability, and continue to capture the White Space in North America. So we're extremely excited about the potential over the next year and go forward. And similarly, in international, tremendous amount of long-term White Space. We're really focused on the markets that matter most and driving accretion in the next 12 months.
So I've been here four and a half years. It's been a really normal four and a half years, right? You know, coming in with the founder situation we had, going through the pandemic, hyperinflation like we've never seen, two wars now, it's been a rollercoaster ride. This brand is the only brand to continue to deliver positive comp sales growth for the last four years. In this space, the only one, and we are accelerating. And the announcements that we made yesterday are transformational for our North American franchisee organization and for our system and for our profitability. So I've never been more bullish. Even when we were up 17% in 2020, I wasn't as bullish as I am about our North America business today. And we're gonna, you know, continue to double down on that in 2024.
Thank you all for being here and for your interest in our company.
Thank you.