PAPA JOHNS INTERNATIONAL INC 10-Q

Item 3. Quantitative and Qualitative Disclosures About Market Risk Interest Rate Risk We are exposed to the impact of interest rate changes on our PJI Revolving Facility and PJMF Revolving Facility. We attempt to minimize interest rate risk exposure by fixing our interest rate through the utilization of interest rate swaps, which are derivative financial instruments. Our swaps are entered into with financial institutions that participate in the PJI Revolving Facility. By using a derivative instrument to hedge exposures to changes in interest rates, we expose ourselves to credit risk due to the possible failure of the counterparty to perform under the terms of the derivative contract. We do not enter into contracts for trading purposes and do not use leveraged instruments. The market risks associated with our debt obligations as of June 25, 2023 have not changed from those reported in “Part II. Item 7A. Quantitative and Qualitative Disclosure About Market Risk” in our Annual Report on Form 10-K for the fiscal year ended December 25, 2022. See “Note 8. Debt” of “Notes to Condensed Consolidated Financial Statements” for additional information on our debt obligations and derivative instruments. Foreign Currency Exchange Rate Risk We are exposed to foreign currency exchange rate fluctuations from our operations outside of the United States, which can adversely impact our revenues, net income and cash flows. Our International operations consist of distribution sales to franchised Papa John’s restaurants located in the UK and our franchise sales and support activities, which derive revenues from sales of franchise and development rights and the collection of royalties from our International franchisees, as well as Company-owned restaurants located in the UK. Approximately 6.7% and 6.3% of our revenues were derived from these operations for the three and six months ended June 25, 2023, respectively, as compared to 6.1% and 6.2% for the prior year comparable periods. We have not historically hedged our exposure to foreign currency fluctuations. Foreign currency exchange rate fluctuations had an unfavorable impact of approximately $0.1 million and $3.0 million on International revenues for the three and six months ended June 25, 2023, and an unfavorable impact of $3.2 million and $4.4 million for the three and six months ended June 26, 2022. Foreign currency exchange rate fluctuations had a favorable impact of approximately $0.2 million and an unfavorable impact of $0.5 million on operating income for the three and six months ended June 25, 2023, respectively, and an unfavorable impact of $0.4 million and $1.0 million on operating income for the three and six months ended June 26, 2022, respectively. Commodity Price Risk In the ordinary course of business, the food and paper products we purchase, including cheese (our largest ingredient cost), are subject to seasonal fluctuations, weather, availability, demand and other factors that are beyond our control. We have pricing agreements with some of our vendors, including forward pricing agreements for a portion of our cheese purchases for our Domestic Company-owned restaurants, which are accounted for as normal purchases; however, we remain exposed to ongoing commodity volatility. 40 The following table presents the actual average block price for cheese by quarter through the second quarter of 2023 and the projected average block price by quarter for 2023 (based on the July 28, 2023 Chicago Mercantile Exchange cheese futures market prices): 2023 2022 Projected Block Price Actual Block Price Quarter 1 $ 1.960 $ 1.966 Quarter 2 1.668 2.296 Quarter 3 1.723 1.938 Quarter 4 1.948 2.066 Full Year $ 1.825 (a) $ 2.067 ___________________________________ (a) The full year estimate is based on futures prices and does not include the impact of forward pricing agreements we have for a portion of our cheese purchases for our domestic Company-owned restaurants. Additionally, the price charged to restaurants can vary somewhat by quarter from the actual block price based upon our monthly pricing mechanism.