PAPA JOHNS INTERNATIONAL INC 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations Overview Papa John’s International, Inc. (referred to as the “Company,” “Papa John’s,” “Papa Johns” or in the first-person notations of “we,” “us” and “our”) operates and franchises pizza delivery and carryout restaurants and, in certain international markets, dine-in and delivery restaurants under the trademark “Papa John’s.” Papa Johns began operations in 1984. As of June 30, 2024, there were 5,883 Papa John’s restaurants in operation, consisting of 570 Company-owned and 5,313 franchised restaurants operating in 49 countries and territories. Our revenues are derived from retail sales of pizza and other food and beverage products to the general public by Company-owned restaurants, franchise royalties, and sales of franchise and development rights. Additionally, we derive revenues from sales to franchisees of various items including food and paper products from our Domestic Quality Control Centers (“QC Centers”), operation of our International QC Center in the United Kingdom (“UK”), contributions received by Papa John’s Marketing Fund (“PJMF”) which is our national marketing fund, information systems equipment, and software and related services. We believe that in addition to supporting both Company and franchised profitability and growth, these activities contribute to product quality and consistency throughout the Papa Johns system. In discussions of our business, “Domestic” is defined as within the contiguous United States, “North America” includes Canada, and “International” includes the rest of the world other than North America. Recent Developments and Trends The Company has focused on executing strategic priorities and building a foundation for long-term success, while navigating a challenging macroeconomic environment. Our progress and significant transactions during the second quarter of 2024 are described below. Focusing on future growth, our “Back to BETTER 2.0” initiative is comprised of long-term strategic initiatives focused on driving systemwide sales through enhancing North America national marketing investment and effectiveness and accelerating North America development. In addition, we are evolving our Domestic Commissary business to provide cost savings for our franchisees and incremental profit for our business model. During the first half of 2024, the Company made significant progress against our priorities of Back to Better 2.0 and International Transformation. Back to Better 2.0 • Product innovation and marketing strategy: In the second quarter, the approved contribution rate increase to PJMF became effective, while local marketing spend remains optional. This strategy shift is intended to increase the productivity of franchisees’ marketing contributions by leveraging the scale that national investments deliver. In earlier 2024, we also launched an all-new brand platform “Better Get You Some” that is part of our deepened commitment to, and investment in, our new marketing strategy. These investments are focused on improving audience segmentation, building consumer loyalty and driving cultural relevance. Additionally during the quarter, we brought back the Cheesy Burger Pizza platform, which is available across a trio of menu items and price points. • Domestic commissary growth strategy: Our previously-announced change in the Domestic Commissary profit model was implemented during the first quarter, with the fixed operating margin that Domestic QC Centers charge increasing to 5% paired with increased rebate opportunities for franchisees. The operating income of the North America Commissary business has also increased, reflecting benefits for both franchisees as well as the Commissary. We also continue to pursue productivity efficiencies throughout the supply chain through improved operations and supplier relationships. 22 International Transformation Plan In December 2023, the Company announced international transformation initiatives (“International Transformation Plan”) designed to evolve our business structure to deliver an enhanced value proposition to our International customers and franchisees, ensure targeted investments and efficient resource management, and better position our largest markets, including the UK, for long-term profitable growth and brand strength. Total estimated pre-tax costs associated with the International Transformation Plan are expected to be approximately $25 million to $35 million (inclusive of the $17.9 million incurred through the second quarter of 2024), which the Company currently expects to be recognized in 2024 and 2025. See “Note 9. Restructuring” of “Notes to Condensed Consolidated Financial Statements” for additional details. During the second quarter of 2024, the Company has made significant progress in executing the International Transformation Plan, with specific actions around UK Optimization as follows: • During the second quarter, we completed several transactions to optimize the UK Company-owned restaurant portfolio. On May 15, 2024, we completed the planned closure of 43 underperforming UK Company-owned restaurants. In June, we successfully refranchised 40 formerly Company-owned restaurants to existing franchisees. On July 1, 2024, we refranchised an additional 20 formerly Company-owned restaurants to primarily existing franchisees. Beginning with the third quarter of 2024, we will continue to operate only 13 Company-owned restaurants in the UK. We have also continued evaluating and right-sizing the UK franchise base, resulting in the closure of 19 franchised locations during the first six months of 2024. Based on these actions, and the continued operating success of our franchisees, we anticipate the UK market to be profit accretive in the second half of 2024. • We are finalizing the evaluation of our restaurant portfolio in the UK, which may result in limited strategic restaurant closures with the Company’s efforts turning towards growth opportunities within this market as we complete optimization of the portfolio. Global Restaurant Sales and Unit Information “Comparable sales” represents sales for the same base of restaurants for the same fiscal periods. “Comparable sales growth (decline)” represents the change in year-over-year comparable sales. “Global system-wide restaurant sales” represents total restaurant sales for all Company-owned and franchised restaurants open during the comparable periods, and “Global system-wide restaurant sales growth (decline)” represents the change in global system-wide restaurant sales year-over-year. Comparable sales, Comparable sales growth (decline), Global system-wide restaurant sales and Global system-wide sales growth (decline) exclude franchisees for which we suspended corporate support. “Equivalent units” represents the number of restaurants open at the beginning of a given period, adjusted for restaurants opened, closed, acquired or sold during the period on a weighted average basis. We believe Domestic Company-owned, North America franchised, and International Comparable sales growth (decline) and Global system-wide restaurant sales information is useful in analyzing our results since our franchisees pay royalties and marketing fund contributions that are based on a percentage of franchise sales. Comparable sales and Global system-wide restaurant sales results for restaurants operating outside of the United States are reported on a constant dollar basis, which excludes the impact of foreign currency translation. Franchise sales also generate commissary revenue in the United States and in certain international markets. Comparable sales growth (decline) and Global system-wide restaurant sales information is also useful for comparison to industry trends and evaluating the strength of our brand. Management believes the presentation of Global system-wide restaurant sales growth, excluding the impact of foreign currency, provides investors with useful information regarding underlying sales trends and the impact of new unit growth without being impacted by swings in the external factor of foreign currency. Franchise restaurant sales are not included in the Company’s revenues. 23 Three Months Ended Six Months Ended Amounts below exclude the impact of foreign currency June 30, 2024 June 25, 2023 June 30, 2024 June 25, 2023 Comparable sales growth (decline): Domestic Company-owned restaurants (4.2)% 2.2% (3.6)% 2.8% North America franchised restaurants (3.4)% (2.3)% (2.4)% (1.6)% North America restaurants (3.6)% (1.4)% (2.7)% (0.7)% International restaurants (0.1)% (0.7)% (1.4)% (3.3)% Total comparable sales growth (decline) (2.7)% (1.3)% (2.4)% (1.3)% System-wide restaurant sales growth (decline): Domestic Company-owned restaurants (1.5)% 2.5% (1.7)% 3.7% North America franchised restaurants (1.9)% (0.6)% (1.8)% 0.1% North America restaurants (1.9)% —% (1.8)% 0.8% International restaurants 2.9% 8.6% 2.2% 5.8% Total global system-wide restaurant sales growth (decline) (0.7)% 2.0% (0.8)% 2.0% Restaurant Progression Three Months Ended Six Months Ended June 30, 2024 June 25, 2023 June 30, 2024 June 25, 2023 North America Company-owned: Beginning of period 536 520 531 522 Opened 1 — 6 — Closed — — — (2) Acquired — 1 — 1 End of period 537 521 537 521 North America franchised: Beginning of period 2,911 2,864 2,902 2,854 Opened 9 13 25 29 Closed (10) (8) (17) (14) Sold — (1) — (1) End of period 2,910 2,868 2,910 2,868 International Company-owned Beginning of period 117 — 117 — Closed (43) — (43) — Acquired — 91 — 91 Refranchised (41) — (41) — End of period 33 91 33 91 International franchised: Beginning of period 2,350 2,341 2,356 2,322 Opened 56 55 79 98 Closed (44) (13) (73) (37) Sold — (91) — (91) Refranchised 41 — 41 — End of period 2,403 2,292 2,403 2,292 Total restaurants – end of period 5,883 5,772 5,883 5,772 Trailing four quarters net store growth 111 209 24 Results of Operations Revenues The following table sets forth the various components of Revenues from the Condensed Consolidated Statements of Operations. Three Months Ended Six Months Ended Increase (Decrease) (Dollars in thousands) June 30, 2024 June 25, 2023 June 30, 2024 June 25, 2023 QTD YTD Revenues: Domestic Company-owned restaurant sales $ 173,207 $ 175,780 $ 349,431 $ 355,646 (1.5) % (1.7) % North America franchise royalties and fees 34,409 34,711 70,106 70,783 (0.9) % (1.0) % North America commissary revenues 198,197 206,980 401,484 419,546 (4.2) % (4.3) % International revenues 39,701 34,608 80,409 66,071 14.7 % 21.7 % Other revenues 62,380 62,451 120,380 129,533 (0.1) % (7.1) % Total revenues $ 507,894 $ 514,530 $ 1,021,810 $ 1,041,579 (1.3) % (1.9) % The comparability of results between 2024 and 2023 is impacted by transactions that have changed the composition of restaurants in the UK during the periods presented. In the second and third quarters of 2023, the Company acquired 118 formerly franchised restaurants in the UK (the “UK franchisee acquisitions”). In the second quarter of 2024, the Company completed the previously-announced closure of 43 Company-owned restaurants in the UK and also refranchised 40 Company-owned restaurants in the UK. These transactions impact the composition of International revenues and the results of the International segment during the periods presented. On July 1, 2024, the Company refranchised an additional 20 Company-owned restaurants in the UK. After prior disposals of two mobile units, the Company is operating 13 UK Company-owned restaurants beginning in the third quarter of 2024. See “Note 9. Restructuring” of the “Notes to Condensed Consolidated Financial Statements” for additional information on these transactions. Total revenues decreased $6.6 million or 1.3% to $507.9 million for the three months ended June 30, 2024 and decreased $19.8 million or 1.9% to $1.02 billion for the six months ended June 30, 2024, as compared to each prior year comparable period. Changes in total revenues are impacted by the transactions noted above and as detailed in the discussion below. Domestic Company-owned restaurant sales decreased $2.6 million, or 1.5%, for the three months ended June 30, 2024 and decreased $6.2 million, or 1.7% for the six months ended June 30, 2024, as compared to each prior year comparable period. The decrease was primarily due to declines in comparable sales of 4.2% and 3.6% for the three and six months ended June 30, 2024, respectively. The comparable sales declines were partially offset by increased equivalent units of 4.1% and 2.3% for the same respective periods. North America franchise royalties and fees decreased $0.3 million, or 0.9%, for the three months ended June 30, 2024 and decreased $0.7 million, or 1.0% for the six months ended June 30, 2024, each as compared to each prior year comparable period. The decreases are primarily due to comparable sales declines of 3.4% and 2.4%, respectively. These declines were partially offset by lower royalty waivers in 2024 as compared to 2023 and growth in units. Equivalent units increased 3.7% and 3.3% for the three and six months ended June 30, 2024, respectively. North America franchise restaurant sales decreased 2.0% to $732.5 million for the three months ended June 30, 2024 compared to the prior year comparable period. North America franchise restaurant sales decreased 1.8% to $1.5 billion for the six months ended June 30, 2024 as compared to the prior year comparable period. North America franchise restaurant sales are not included in Company revenues; however, our North America franchise royalties are derived from these sales. North America commissary revenues decreased $8.8 million or 4.2% for the three months ended June 30, 2024 and decreased $18.1 million, or 4.3% for the six months ended June 30, 2024, each as compared with the prior year comparable period. The declines were due to a combination of lower commodity prices , particularly cheese, and lower volumes. 25 International revenues increased $5.1 million, or 14.7%, for the three months ended June 30, 2024 and increased $14.3 million, or 21.7% for the six months ended June 30, 2024, each as compared with the prior year comparable period. As mentioned above, the UK franchisee acquisitions in 2023 and the UK restaurant closures and refranchising transactions in the second quarter of 2024 impact the comparability of International revenues earned in each period. The net increase in revenue related to the UK franchisee acquisitions was approximately $5.2 million and $14.9 million for the three and six months ended June 30, 2024, respectively, representing sales and royalties attributable to this group of restaurants compared to prior year. Excluding the impact of the UK franchisee acquisitions, International revenues would have decreased $0.1 million and $0.6 million for the three and six months ended June 30, 2024, respectively. International franchise restaurant sales decreased $10.4 million to $287.1 million and decreased $28.8 million to $562.2 million for the three and six months ended June 30, 2024, respectively. This decrease includes the impact of the UK franchisee acquisitions moving out of franchise restaurant sales and into Company-owned sales. Excluding the impact of the UK franchisee acquisitions and foreign currency fluctuations, International franchise restaurant sales increased $12.2 million or 4.3% and $16.4 million or 2.9% for the three and six months ended June 30, 2024, respectively. International franchise restaurant sales are not included in Company revenues; however, our international royalty revenue is derived from these sales. Other revenues, which primarily includes our national marketing funds and online and mobile ordering business, were flat and decreased $9.2 million, or 7.1%, for the three and six months ended June 30, 2024 compared to the prior year comparable periods. Our results for the three and six months ended June 25, 2023 included revenues of $4.8 million and $9.9 million, respectively, related to Preferred Marketing, our formerly wholly-owned print and promotions company which was sold in the fourth quarter of 2023. This was offset during the second quarter of 2024 primarily by a $4.2 million increase in marketing fees due to a planned increase in the national marketing fund contribution percentage that went into effect during the quarter and an increase in franchised locations. 26 Costs and Expenses The following table sets forth the various components of Costs and expenses from the Condensed Consolidated Statements of Operations, expressed as a percentage of the associated revenue component. (Dollars in thousands) Three Months Ended June 30, 2024 % of Related Revenues June 25, 2023 % of Related Revenues Increase (Decrease) in % of Revenues Costs and expenses: Operating costs (excluding depreciation and amortization shown separately below): Domestic Company-owned restaurant expenses $ 138,033 79.7 % $ 143,705 81.8 % (2.1) % North America commissary expenses 182,299 92.0 % 190,468 92.0 % — % International expenses 27,077 68.2 % 20,435 59.0 % 9.2 % Other expenses 56,951 91.3 % 58,996 94.5 % (3.2) % General and administrative expenses 57,714 11.4 % 50,324 9.8 % 1.6 % Depreciation and amortization 17,594 3.5 % 15,690 3.0 % 0.5 % Total costs and expenses 479,668 94.4 % 479,618 93.2 % 1.2 % Operating income $ 28,226 5.6 % $ 34,912 6.8 % (1.2) % (Dollars in thousands) Six Months Ended June 30, 2024 % of Related Revenues June 25, 2023 % of Related Revenues Increase (Decrease) in % of Revenues Costs and expenses: Operating costs (excluding depreciation and amortization shown separately below): Domestic Company-owned restaurant expenses $ 276,786 79.2 % $ 291,489 82.0 % (2.8) % North America commissary expenses 367,498 91.5 % 386,883 92.2 % (0.7) % International expenses 55,423 68.9 % 37,746 57.1 % 11.8 % Other expenses 108,718 90.3 % 120,074 92.7 % (2.4) % General and administrative expenses 116,173 11.4 % 102,268 9.8 % 1.6 % Depreciation and amortization 35,268 3.5 % 30,411 2.9 % 0.6 % Total costs and expenses 959,866 93.9 % 968,871 93.0 % 0.9 % Operating income $ 61,944 6.1 % $ 72,708 7.0 % (0.9) % Total costs and expenses were $479.7 million or 94.4% of total revenues for the three months ended June 30, 2024 as compared to $479.6 million or 93.2% of total revenues for the prior year comparable period. For the six months ended June 30, 2024, total costs and expenses were $959.9 million or 93.9% of total revenues, as compared to $968.9 million, or 93.0% of total revenues for the prior year comparable period. The changes in total costs and expenses, as percentages of revenues, were primarily due to the following: Domestic Company-owned restaurant expenses were $138.0 million or 79.7% of related revenues for the three months ended June 30, 2024 as compared to expenses of $143.7 million or 81.8% of related revenues for the prior year period. For the six months ended June 30, 2024 Domestic Company-owned restaurant expenses were $276.8 million or 79.2% of related revenues as compared to expenses of $291.5 million or 82.0% of related revenues for the prior year comparable period. The quarter and year-to-date decreases of 2.1% and 2.8%, respectively, were primarily due to lower insurance expenses related to improved auto liability claims experience, lower utility costs, and lower advertising spend that we expect to incur later in 2024. North America commissary expenses were $182.3 million, or 92.0% of related revenues for the three months ended June 30, 2024 as compared to $190.5 million, or 92.0% of related revenues for the prior year comparable period. For the 27 six months ended June 30, 2024 North America commissary expenses were $367.5 million, or 91.5% of related revenues as compared to $386.9 million, or 92.2% of related revenues for the prior year comparable period. The expense, as a percentage of related revenues, was flat and decreased 0.7% for the three and six months ended June 30, 2024 primarily due to declining commodity prices for cheese and lower volumes. International expenses were $27.1 million, or 68.2% of related revenues for the three months ended June 30, 2024 as compared to $20.4 million, or 59.0% of related revenues for the prior year comparable period. For the six months ended June 30, 2024, International expenses were $55.4 million, or 68.9% of related revenues as compared to expenses of $37.7 million, or 57.1% of related revenues for the prior year comparable period. International expenses increased in 2024 as a result of the UK franchisee acquisitions, which added operating costs related to Company-owned restaurants, partially offset by declining commodity prices at our International commissary. Other expenses were $57.0 million, or 91.3% of related revenues for the three months ended June 30, 2024, as compared to $59.0 million, or 94.5% for the prior year comparable period. For the six months ended June 30, 2024, Other expenses were $108.7 million, or 90.3% of related revenues as compared to expenses of $120.1 million, or 92.7% of related revenues for the prior year comparable period. The decrease reflects $4.7 million and $9.5 million of expenses incurred for the three and six months ended June 25, 2023 related to Preferred Marketing, our formerly wholly-owned print and promotions company, which was sold in the fourth quarter of 2023. This decrease was partially offset during the second quarter of 2024 by a $3.8 million increase in advertising expenses due to a planned increase in the national marketing fund contribution percentage that went into effect during the quarter and an increase in franchised locations. General and Administrative Expenses General and Administrative (“G&A”) expenses were $57.7 million, or 11.4% of revenues for the three months ended June 30, 2024 as compared to $50.3 million, or 9.8% of revenues for the prior year comparable period. For the six months ended June 30, 2024, G&A expenses were $116.2 million or 11.4% of revenues compared to $102.3 million or 9.8% of revenues for the prior year comparable period. G&A expenses increased $7.4 million and $13.9 million, respectively, for the three and six months ended June 30, 2024 primarily due to $6.1 million and $15.7 million incurred related to the International Transformation Plan (see “Note 9. Restructuring”) as well as $4.0 million related to a non-cash impairment charge to write down the carrying value of property and equipment and intangible assets for certain Domestic restaurants. This increase was partially offset by lower equity compensation costs related to leadership changes and lower costs in 2024 as the bi-annual franchise operating conference took place in 2023. Depreciation and Amortization Depreciation and amortization expense was $17.6 million, or 3.5% of revenues for the three months ended June 30, 2024, as compared to $15.7 million, or 3.0% of revenues for the prior year comparable period. For the six months ended June 30, 2024, depreciation and amortization expense was $35.3 million, or 3.5% of revenues as compared to $30.4 million, or 2.9% of revenues for the prior year comparable period. The increases of $1.9 million and $4.9 million, respectively, for the three and six months ended June 30, 2024, was primarily due to higher depreciation expense related to our investments in technology platforms and the UK franchisee acquisitions. Operating Income by Segment Operating income is summarized in the following table on a reporting segment basis. Adjusted operating income, a non-GAAP measure, is also presented below. See “Non-GAAP Measures” for a reconciliation to the most comparable U.S. GAAP measure. We believe this non-GAAP measure is important for comparability purposes. 28 Three Months Ended June 30, 2024 Three Months Ended June 25, 2023 (In thousands) Reported Adjustments (a) Adjusted Reported Adjustments (a) Adjusted Reported Increase (Decrease) Adjusted Increase (Decrease) Domestic Company-owned restaurants $ 4,777 $ 4,000 $ 8,777 $ 6,641 $ — $ 6,641 $ (1,864) $ 2,136 North America franchising 32,409 — 32,409 32,111 — 32,111 298 298 North America commissaries 11,403 — 11,403 10,397 — 10,397 1,006 1,006 International (2,665) 6,129 3,464 3,763 1,308 5,071 (6,428) (1,607) All others 2,170 — 2,170 1,343 — 1,343 827 827 Unallocated corporate expenses (19,598) — (19,598) (19,701) 661 (19,040) 103 (558) Elimination of intersegment (profits) losses (270) — (270) 358 — 358 (628) (628) Total $ 28,226 $ 10,129 $ 38,355 $ 34,912 $ 1,969 $ 36,881 $ (6,686) $ 1,474 Six Months Ended June 30, 2024 Six Months Ended June 25, 2023 (In thousands) Reported Adjustments (a) Adjusted Reported Adjustments (a) Adjusted Reported Increase (Decrease) Adjusted Increase (Decrease) Domestic Company-owned restaurants $ 15,136 $ 4,000 $ 19,136 $ 13,291 $ — $ 13,291 $ 1,845 $ 5,845 North America franchising 66,120 — 66,120 65,511 — 65,511 609 609 North America commissaries 23,738 — 23,738 21,127 — 21,127 2,611 2,611 International (8,654) 15,652 6,998 10,995 1,308 12,303 (19,649) (5,305) All others 5,368 — 5,368 4,500 — 4,500 868 868 Unallocated corporate expenses (39,240) — (39,240) (43,067) 2,017 (41,050) 3,827 1,810 Elimination of intersegment (profits) losses (524) — (524) 351 — 351 (875) (875) Total $ 61,944 $ 19,652 $ 81,596 $ 72,708 $ 3,325 $ 76,033 $ (10,764) $ 5,563 ___________________________________ (a) See “Non-GAAP Measures” below for a detail of the adjustments in each period and for a reconciliation to the most comparable U.S. GAAP measure. Operating income was $28.2 million and $61.9 million for the three and six months ended June 30, 2024, respectively, as compared to $34.9 million and $72.7 million for the prior year comparable periods, a decrease of $6.7 million and $10.8 million, respectively. Adjusted operating income was $38.4 million and $81.6 million for the three and six months ended June 30, 2024, respectively, as compared to $36.9 million and $76.0 million for the prior year comparable periods, an increase of $1.5 million and $5.6 million, respectively. The fluctuations in adjusted operating income in 2024 compared to 2023 were primarily due to the following: • Domestic Company-owned restaurants increased $2.1 million and $5.8 million for the three and six months ended June 30, 2024. The increase was primarily due to lower advertising, utility and insurance costs, combined with lower commodity prices, which were partially offset by lower revenues from 4.2% and 3.6% declines in comparable sales for the respective periods. • North America franchising increased $0.3 million and $0.6 million for the three and six months ended June 30, 2024. The increase is primarily due to a 3.7% and 3.3% increase in equivalent units, partially offset by a decrease in comparable sales of 3.4% and 2.4% for the respective periods. • North America commissaries increased $1.0 million and $2.6 million for the three and six months ended June 30, 2024, primarily due to the increase in the commissary fixed operating margin, which became effective in 2024, partially offset by anticipated franchisee rebates. 29 • International decreased $1.6 million and $5.3 million for the three and six months ended June 30, 2024 primarily driven by operating losses including increased depreciation expense attributable to the UK franchisee acquisitions as well as comparable sales declines of 0.1% and 1.4% for the respective periods. As mentioned above, during the second quarter of 2024, 43 of the UK Company-owned restaurants were closed and an additional 40 were refranchised. 20 additional UK Company-owned restaurants were refranchised effective July 1, 2024. Beginning in the third quarter of 2024, we will operate 13 Company-owned stores in the UK. • All Others, which primarily includes our online and mobile ordering business and our marketing funds, increased $0.8 million and $0.9 million during the three and six months ended June 30, 2024 primarily due to prior year losses incurred by Preferred Marketing, our formerly wholly-owned print and promotions company, which was sold in the fourth quarter of 2023. • Unallocated corporate expenses increased $0.6 million for three months ended June 30, 2024 and decreased $1.8 million for the six months ended June 30, 2024. The decrease during the year-to-date period was primarily due to the reversal of stock compensation expense for unvested equity units from leadership transitions, which was partially offset by higher depreciation expense related to our investments in technology support initiatives. Items Below Operating Income The following table sets forth the various items below Operating income from the Condensed Consolidated Statements of Operations: Three Months Ended Six Months Ended Increase (Decrease) (In thousands, except per share amounts) June 30, 2024 June 25, 2023 June 30, 2024 June 25, 2023 QTD YTD Operating income $ 28,226 $ 34,912 $ 61,944 $ 72,708 $ (6,686) $ (10,764) Net interest expense (10,896) (11,275) (21,959) (20,296) 379 (1,663) Income before income taxes 17,330 23,637 39,985 52,412 (6,307) (12,427) Income tax expense 4,794 5,778 12,535 12,007 (984) 528 Net income before attribution to noncontrolling interests 12,536 17,859 27,450 40,405 (5,323) (12,955) Net income attributable to noncontrolling interests (293) (91) (571) (261) (202) (310) Net income attributable to the Company $ 12,243 $ 17,768 $ 26,879 $ 40,144 $ (5,525) $ (13,265) Basic earnings per common share $ 0.37 $ 0.55 $ 0.82 $ 1.20 $ (0.18) $ (0.38) Diluted earnings per common share $ 0.37 $ 0.54 $ 0.82 $ 1.20 $ (0.17) $ (0.38) Net Interest Expense Net interest expense decreased $0.4 million and increased $1.7 million, or 3.4% and 8.2% for the three and six months ended June 30, 2024. The increase for the six months ended June 30, 2024 was due to higher average outstanding debt as well as an increase in borrowing rates. Income Tax Expense (Benefit) Our effective income tax rate was 27.7% and 31.3% for the three and six months ended June 30, 2024 as compared to an income tax rate of 24.4% and 22.9% for the prior year comparable periods. The higher effective tax rate for the three and six months ended June 30, 2024 was driven by impairment charges related to the International Restructuring that created unrecognized tax losses and prevented the Company from generating foreign tax credits as well as a tax shortfall generated by stock option exercises and vesting of restricted shares in 2024 along with a lower pre-tax income. 30 Three Months Ended Six Months Ended (Dollars in thousands) June 30, 2024 June 25, 2023 June 30, 2024 June 25, 2023 Income before income taxes $ 17,330 $ 23,637 $ 39,985 $ 52,412 Income tax expense $ 4,794 $ 5,778 $ 12,535 $ 12,007 Effective tax rate 27.7 % 24.4 % 31.3 % 22.9 % Net Income Attributable to Noncontrolling Interests Net income attributable to noncontrolling interests was $0.3 million and $0.6 million for the three and six months ended June 30, 2024 as compared with $0.1 million and $0.3 million for the prior year comparable periods. Diluted Earnings Per Common Share Diluted earnings per common share was $0.37 and $0.82 for the three and six months ended June 30, 2024 as compared to $0.54 and $1.20 for the prior year comparable periods, representing decreases of $0.17 and $0.38, respectively. Adjusted diluted earnings per common share, a non-GAAP measure, was $0.61 and $1.28 for the three and six months ended June 30, 2024 as compared to adjusted diluted earnings per common share of $0.59 and $1.28 for the prior year comparable periods, representing an increase of $0.02 for the quarter and flat for the six month period. See “Non-GAAP Measures” for additional information. 31 Non-GAAP Measures In addition to the results provided in accordance with U.S. GAAP, we provide certain non-GAAP measures, which present results on an adjusted basis. These are supplemental measures of performance that are not required by or presented in accordance with U.S. GAAP and include the following: adjusted operating income, adjusted net income attributable to common shareholders and adjusted diluted earnings per common share. We believe that our non-GAAP financial measures enable investors to assess the operating performance of our business relative to our performance based on U.S. GAAP results and relative to other companies. We believe that the disclosure of these non-GAAP measures is useful to investors as they reflect metrics that our management team and Board utilize to evaluate our operating performance, allocate resources and administer employee incentive plans. The most directly comparable U.S. GAAP measures to adjusted operating income, adjusted net income attributable to common shareholders and adjusted diluted earnings per common share are operating income, net income attributable to common shareholders and diluted earnings per common share, respectively. These non-GAAP measures should not be construed as a substitute for or a better indicator of the Company’s performance than the Company’s U.S. GAAP results. The table below reconciles our GAAP financial results to our non-GAAP financial measures. Three Months Ended Six Months Ended (In thousands, except per share amounts) June 30, 2024 June 25, 2023 June 30, 2024 June 25, 2023 Operating income $ 28,226 $ 34,912 $ 61,944 $ 72,708 International restructuring costs (a) 6,129 — 15,652 — UK repositioning and acquisition-related costs (b) — 1,308 — 1,308 Other costs (c) 4,000 661 4,000 2,017 Adjusted operating income $ 38,355 $ 36,881 $ 81,596 $ 76,033 Net income attributable to common shareholders $ 12,243 $ 17,768 $ 26,879 $ 40,144 International restructuring costs (a) 6,129 — 15,652 — UK repositioning and acquisition-related costs (b) — 1,308 — 1,308 Other costs (c) 4,000 661 4,000 2,017 Tax effect of adjustments (d) (2,289) (449) (4,441) (758) Adjusted net income attributable to common shareholders $ 20,083 $ 19,288 $ 42,090 $ 42,711 Diluted earnings per common share $ 0.37 $ 0.54 $ 0.82 $ 1.20 International restructuring costs (a) 0.19 — 0.48 — UK repositioning and acquisition-related costs (b) — 0.04 — 0.04 Other costs (c) 0.12 0.02 0.12 0.06 Tax effect of adjustments (d) (0.07) (0.01) (0.14) (0.02) Adjusted diluted earnings per common share $ 0.61 $ 0.59 $ 1.28 $ 1.28 ___________________________________ (a) Represents costs associated with the Company’s International Restructuring plan. See “Note 9. Restructuring” (b) Represents costs associated with repositioning the UK portfolio as well as transaction costs related to the acquisition of restaurants from franchisees. (c) For the three and six months ended June 30, 2024, represents a non-cash impairment charge related to fixed and intangible assets related to certain Domestic restaurants. Refer to Note 2. Significant Accounting Policies of the “Notes to Condensed Consolidated Financial Statements” for further details. For the three and six months ended June 25, 2023, represents severance and related costs associated with the transition of certain executives, recorded in General and administrative expenses. (d) The tax effect on non-GAAP adjustments was calculated by applying the marginal tax rates of 22.6% and 22.8% for the three and six months ended June 30, 2024 and June 25, 2023, respectively. In addition, we present free cash flow in this report, which is a non-GAAP measure. Please see “Liquidity and Capital Resources – Free Cash Flow” for a discussion of why we believe free cash flow provides useful information regarding our financial condition and results of operations, and a reconciliation of free cash flow to the most directly comparable U.S. GAAP measure. 32 Liquidity and Capital Resources Our primary sources of liquidity and capital resources are cash flows from operations and borrowings under our senior secured revolving credit facility (the “PJI Revolving Facility”). Our principal uses of cash are operating expenses, capital expenditures, and returning value to our shareholders in the form of cash dividends and share repurchases. Our capital priorities are: • investing for growth • maintaining a strong balance sheet, and • returning capital to shareholders The Company believes that its balances of cash and cash equivalents and borrowing capacity, along with cash generated by operations, will be sufficient to satisfy its cash requirements, cash dividends, interest payments and share repurchases over the next twelve months and beyond. Cash Flows The table below summarizes our cash flows for the six months ended June 30, 2024 and June 25, 2023 (in thousands): Six Months Ended June 30, 2024 June 25, 2023 Total cash provided by (used in): Operating activities $ 41,957 $ 93,735 Investing activities (23,841) (35,727) Financing activities (34,428) (61,620) Effect of exchange rate changes on cash and cash equivalents 30 11 Change in cash and cash equivalents $ (16,282) $ (3,601) Operating Activities Total cash provided by operating activities was $42.0 million for the six months ended June 30, 2024 compared to $93.7 million for the corresponding period of 2023. The decrease of $51.8 million primarily reflects unfavorable working capital changes in the first half of 2024, principally related to the timing of payments and higher accrual balances at December 31, 2023 related to the 53rd week of our 2023 fiscal year. These factors resulted in several large disbursements during the first half of 2024, driving outflows in working capital. In addition, in the first half of 2024 compared to the first half of 2023, depreciation expenses were higher due to the UK franchisee acquisitions and impairment charges which were incurred due to UK restructuring initiatives, partially offset by stock compensation expense reversal for unvested equity units as a result of leadership transitions. Investing Activities Total cash used in investing activities was $23.8 million for the six months ended June 30, 2024 compared to $35.7 million for the same period in 2023, or a decrease of $11.9 million. The decrease in cash used in investing activities was primarily due to lower capital expenditures and fewer notes issued to franchisees in the first six months of 2024 as compared to 2023. We also received a $2.3 million investment distribution in the first six months of 2024 related to our deferred compensation plan. Our capital expenditures consisted primarily of capital investments for existing stores and new store locations as well as investments in technology platforms. We estimate that our capital expenditures during 2024 will be approximately $75 million to $85 million. This estimate includes the acquisition of sites and construction costs for new Company-owned stores that have opened or that we expect to open during 2024. We intend to fund our capital expenditures with cash generated by operations and borrowings under our PJI Revolving Facility, as necessary. Financing Activities Total cash used in financing activities was $34.4 million for the six months ended June 30, 2024 compared to $61.6 million for the same period of 2023. In the first six months of 2024, the principal financing outflows were related to dividend 33 payments of $30.2 million, $3.3 million in tax payments on equity award issuances and $4.8 million in payments related to financing leases. These outflows were offset by net borrowings of $0.6 million from the PJI Revolving Facility and $2.4 million from the PJMF revolving line of credit (the “PJMF Revolving Facility”). There were no share repurchases in the first six months of 2024. In the first six months of 2023, cash used for financing activities primarily reflects the impact of share repurchases of $210.3 million, which were financed through $186.5 million in net borrowing from the PJI Revolving Facility. Other financing outflows in the first six months of 2023 included $28.5 million in dividend payments, $6.1 million in tax payments on equity award issuances and $3.7 million in payments related to financing leases. Debt Our outstanding debt as of June 30, 2024 was $767.0 million, which was comprised of $400.0 million principal amount of our 3.875% senior notes (the “Notes”) and $367.0 million outstanding under the PJI Revolving Facility and the PJMF Revolving Facility. Remaining availability under the PJI Revolving Facility was approximately $235.3 million as of June 30, 2024. Our Credit Agreement, dated September 14, 2021 and amended May 30, 2023 (as amended, the “Credit Agreement”), contains affirmative and negative covenants that, among other things, require customary reporting obligations and restrict, subject to certain exceptions, the incurrence of additional indebtedness and liens, the consummation of certain mergers, consolidations, sales of assets and similar transactions, the making of investments, equity distributions and other restricted payments, and transactions with affiliates. The Company is also subject to certain financial covenants, as shown in the following table, that could restrict or impose constraints on the liquidity of our business: Permitted Ratio Actual Ratio as of June 30, 2024 Leverage ratio Not to exceed 5.25 to 1.0 3.1 to 1.0 Interest coverage ratio Not less than 2.00 to 1.0 3.2 to 1.0 Our leverage ratio is defined as outstanding debt divided by Consolidated EBITDA (as defined in the Credit Agreement) for the most recent four fiscal quarters. Our interest coverage ratio is defined as the sum of Consolidated EBITDA and consolidated rental expense for the most recent four fiscal quarters divided by the sum of consolidated interest expense and consolidated rental expense for the most recent four fiscal quarters. We were in compliance with all financial covenants as of June 30, 2024. In addition, the Indenture governing the Notes contains customary covenants that, among other things and subject to certain exceptions, limit our ability and the ability of certain of our subsidiaries to: incur additional indebtedness and guarantee indebtedness; pay dividends or make other distributions or repurchase or redeem our capital stock; prepay, redeem or repurchase certain debt; issue certain preferred stock or similar equity securities; make loans and investments; sell assets; incur liens; enter into transactions with affiliates; enter into agreements restricting our subsidiaries’ ability to pay dividends; and consolidate, merge or sell all or substantially all of our assets. The PJMF Revolving Facility consists of a $30.0 million revolving line of credit pursuant to a Revolving Loan Agreement, dated September 30, 2015, and amended September 30, 2023, with U.S. Bank National Association, as lender. Debt outstanding under the PJMF Revolving Facility was approximately $2.4 million as of June 30, 2024. The PJMF operating results and the related debt outstanding do not impact the financial covenants under the Company’s Credit Agreement. Refer to Note 12 of the consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, 2023 for additional information. Share Repurchases As part of our long-term growth and capital allocation strategy, we are committed to investing in share repurchases to provide ongoing value and enhanced returns to our shareholders. On October 28, 2021, our Board of Directors approved a share repurchase program with an indefinite duration for up to $425.0 million of the Company’s common stock. 34 The following table summarizes our repurchase activity under this program for the three and six months ended June 30, 2024 and June 25, 2023: (In thousands, except average price per share) Total Number of Shares Purchased Average Price Paid per Share Aggregate Cost of Shares Purchased Maximum Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs Three Months Ended June 30, 2024 — $ — $ — $ 90,160 June 25, 2023 — $ — $ — $ 90,160 (In thousands, except average price per share) Total Number of Shares Purchased (a) Average Price Paid per Share Aggregate Cost of Shares Purchased (b) Maximum Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs Six Months Ended June 30, 2024 — $ — $ — $ 90,160 June 25, 2023 2,523 $ 83.10 $ 209,640 $ 90,160 (a) The shares repurchased during the six months ended June 25, 2023 included 2,176,928 shares repurchased on March 1, 2023 from certain funds affiliated with, or managed by, Starboard Value LP at a price of $82.52 per share for aggregate consideration of $179.6 million. (b) Aggregate cost of shares purchased for the six months ended June 25, 2023 excluded $2.8 million of transaction costs directly attributable to share repurchases, including a 1% excise tax incurred under the Inflation Reduction Act of 2022. Of these costs, $2.1 million were classified as non-cash financing activities during the six months ended June 25, 2023. The Company utilizes a written trading plan under Rule 10b5-1 under the Securities Exchange Act of 1934, as amended, from time to time to facilitate the repurchase of shares of our common stock under this share repurchase program. There can be no assurance that we will repurchase shares of our common stock either through a Rule 10b5-1 trading plan or otherwise. Dividends The Company paid aggregate cash dividends to common stockholders of $30.2 million ($0.92 per share) and $28.5 million ($0.84 per share) for the six months ended June 30, 2024 and June 25, 2023, respectively. On July 31, 2024, our Board of Directors declared a third quarter dividend of $0.46 per common share (approximately $15.2 million in the aggregate), which will be paid on August 30, 2024 to stockholders of record as of the close of business on August 19, 2024. The declaration and payment of any future dividends will be at the discretion of our Board of Directors. Free Cash Flow Free cash flow, a non-GAAP measure, is defined as net cash provided by operating activities (from the Condensed Consolidated Statements of Cash Flows) less the purchases of property and equipment. We view free cash flow as an important financial measure because it is one factor that management uses in determining the amount of cash available for discretionary investment. Free cash flow is not a term defined by GAAP, and as a result, our measure of free cash flow might not be comparable to similarly titled measures used by other companies. Free cash flow should not be construed as a substitute for or a better indicator of the Company’s performance than the Company’s GAAP measures. The Company’s free cash flow was as follows for the six month periods of 2024 and 2023 (in thousands): Six Months Ended June 30, 2024 June 25, 2023 Net cash provided by operating activities $ 41,957 $ 93,735 Purchases of property and equipment (29,155) (34,759) Free cash flow $ 12,802 $ 58,976 Cash Requirements There have been no material changes in our cash requirements other than in the ordinary course of business since the end of 2023. Refer to “Contractual Obligations” presented within “Item 7. Management’s Discussion and Analysis of Financial 35 Condition and Results of Operations” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2023 for additional information regarding our cash requirements. Forward-Looking Statements Certain matters discussed in this Quarterly Report on Form 10-Q and other Company communications that are not statements of historical fact constitute forward-looking statements within the meaning of the federal securities laws. Generally, the use of words such as “expect,” “intend,” “estimate,” “believe,” “anticipate,” “will,” “forecast,” “outlook”, “plan,” “project,” or similar words identify forward-looking statements that we intend to be included within the safe harbor protections provided by the federal securities laws. Such forward-looking statements include or may relate to projections or guidance concerning business performance, revenue, earnings, cash flow, earnings per share, share repurchases, the current economic environment, commodity and labor costs, currency fluctuations, profit margins, supply chain operating margin, net unit growth, unit level performance, capital expenditures, restaurant and franchise development, restaurant acquisitions, restaurant closures, labor shortages, labor cost increases, changes in management, inflation, royalty relief, franchisee support and incentives, the effectiveness of our menu innovations and other business initiatives, investments in product and digital innovation, marketing efforts and investments, liquidity, compliance with debt covenants, impairments, strategic decisions and actions, changes to our national marketing fund, changes to our commissary model, dividends, effective tax rates, regulatory changes and impacts, investments in and repositioning of the UK market, International restructuring plans, timing and costs, International consumer demand, adoption of new accounting standards, and other financial and operational measures. Such statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions, which are difficult to predict and many of which are beyond our control. Therefore, actual outcomes and results may differ materially from those matters expressed or implied in such forward-looking statements. The risks, uncertainties and assumptions that are involved in our forward-looking statements include, but are not limited to: • the ability of the Company to manage challenging macroeconomic conditions in the United States and internationally, including the United Kingdom; • the ability of the Company to retain key management and manage staffing and labor shortages at Company and/or franchised restaurants and our Quality Control Centers; • increases in labor costs, food costs or sustained higher other operating costs, including as a result of supply chain disruption, inflation or climate change; • the potential for delayed new store openings, both domestically and internationally; • the increased risk of phishing, ransomware and other cyber-attacks; • risks to the global economy and our business related to the conflict in Ukraine and the Middle East and other international conflicts; • increased costs for branding initiatives and launching new advertising and marketing campaigns and promotions to boost consumer sentiment and sales trends, and the risk that such initiatives will not be effective; • risks related to a possible economic slowdown that could, among other things, reduce consumer spending or demand and result in changing consumer practices; • risks related to social media, including publicity adversely and rapidly impacting our brand and reputation; • aggressive changes in pricing or other marketing or promotional strategies by competitors, which may adversely affect sales and profitability; and new product and concept developments by food industry competitors; • changes in consumer preferences or consumer buying habits, including the growing popularity of delivery aggregators, as well as changes in general economic conditions or other factors that may affect consumer confidence and discretionary spending, including higher unemployment; • the adverse impact on the Company or our results caused by global health concerns, product recalls, food quality or safety issues, incidences of foodborne illness, food contamination and other general public health concerns about our Company-owned or franchised restaurants or others in the restaurant industry; • the effectiveness of our technology investments and changes in unit-level operations; • the ability of the Company and its franchisees to meet planned growth targets and operate new and existing restaurants profitably, including difficulties finding qualified franchisees, restaurant level employees or suitable sites; • increases in insurance claims and related costs for programs funded by the Company up to certain retention limits, including medical, owned and non-owned vehicles, workers’ compensation, general liability and property; • disruption of our supply chain or commissary operations which could be caused by our sole source of supply of mozzarella cheese, desserts, garlic cups or limited source of suppliers for other key ingredients or more generally due to weather, natural disasters including drought, disease, or geopolitical or other disruptions beyond our control; 36 • increased risks associated with our International operations, including economic and political conditions, instability or uncertainty in our international markets, especially emerging markets, fluctuations in currency exchange rates, difficulty in meeting planned sales targets and new restaurant growth; • the impact of current or future claims and litigation and our ability to comply with current, proposed or future legislation that could impact our business; • risks related to our indebtedness and borrowing costs, including prolonged higher interest rates, and the current state of the credit markets; • the Company’s ability to continue to pay dividends to stockholders based upon profitability, cash flows and capital adequacy if restaurant sales and operating results decline; • our ability to effectively operate and improve the performance of International Company-owned restaurants; • disruption of critical business or information technology systems, or those of our suppliers, and risks associated with systems failures and data privacy and cybersecurity incidents, including theft of confidential Company, employee and customer information, including payment cards; and • changes in Federal or state income, general and other tax laws, rules and regulations and changes in generally accepted accounting principles. These and other risk factors are discussed in detail in “Part I. Item 1A. – Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2023. We undertake no obligation to update publicly any forward-looking statements, whether as a result of future events, new information or otherwise, except as required by law.