Papa John's International Inc

NASDAQ:PZZA

Earnings Call Transcript 2019-Q1

[Operator]

Good day, ladies and gentlemen. And welcome to the Papa John’s First Quarter 2019 Conference Call and Webcast. At this time, all participants are in a listen-only mode. Later, we will conduct the question-and-answer session and instructions will follow at that time [Operator Instructions]. As a reminder, this conference call is being recorded.

I would now like to turn the conference to your host, Mr. Steve Coke, Vice President of Investor Relations and Strategic Planning. Sir, you may begin.

[Steve Coke]

Thank you, Valerie. Good afternoon. Joining me on the call today are President and CEO, Steve Ritchie; our CFO, Joe Smith; and Mike Nettles, our Chief Operating and Growth Officer. Steve and Joe will have comments about our business and provide a financial update. After the prepared remarks, Steve, Joe and Mike, 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 Web site for a reconciliation of non-GAAP financial measures discussed on this call. Finally, we ask any members of the media to be in a listen-only mode.

Now, I’d like to turn the call over to Steve Ritchie for his comments. Steve?

[Steve Ritchie, President and CEO]

Thank you, Steve, and good afternoon, everyone. Papa John’s first quarter results were line with our fiscal 2019 plan for consistent incremental steps to improve the key drivers of our business. Just as importantly, we took large strides strengthening the foundations of our business and positions Papa John’s to realize the full potential of our differentiated market position for the benefit of shareholders and all stakeholders.

This afternoon, I'd like to address our progress on both fronts. In the first quarter, North America comps were down 6.9%. This is a sequential improvement over the fourth quarter when comp sales in North America were down 8.1%. It also reflects an improvement in February and March compared to January when comp sales have declined 10.5% due to ticket pressure from ineffective promotions and the initial impact of the conversions of the Company's new loyalty program as we previously reported.

International comps were essentially flat in the first quarter. A sequential improvement compared with 2.6% decline in the fourth quarter. North America results continue to be impacted by the consumer sentiment challenges our brand have experienced in the U.S. since last July. As I'll discuss in more detail in a moment, we took multiple actions in Q1 that impact the brand positively, including the launch of the Papa John’s foundation and its initial brands; the introduction of our fully funded college tuition program and corporate team members through Purdue University Global; the investment from Starboard Value and the addition of several new board members, which included the partnership with Shaquille O'Neal. Our initial analysis shows an improvement in consumer sentiment surrounding these announcements and we are encouraged by these early signs of progress.

Lasting consumer sentiment change takes time, and we expect it will continue to be headwind for our North American business in the second quarter. As a result, we are holding guidance for North America comps to negative 1% to negative 5% for the full-year. Still, I'm confident we are making significant progress to realize Papa John's long term potential.

First, our partnership with Starboard is off to a great start since their February investment in the Company. Our new Chairman, Jeff Smith, is actively engaged in the business, leveraging his turnaround experience in the restaurant and retail space and keeping us focused on what matters most, the quality of our pizza and our connection with our customers. And a clear sign of Starboard's confidence and the potential of Papa John's, it exercise its option to invest $50 million more into our business at the end of March. As we previously said, we'll carefully allocate this capital in addition to the original $200 million investment to strengthen our balance sheet and make strategic investments to reinforce our brand market position and drive long term performance.

Second, we announced a very exciting partnership with Shaquille O'Neal, the NBA Hall of Famer, Entrepreneur and restaurateur is now Papa John's newest Director, as well as soon to be franchisee and later this year, brand ambassador. We are extremely pleased by the positive reaction with this announcement by all of our stakeholders, including shareholders, franchises, consumers, analysts and our team members. Shaquille is already a fantastic addition to the board and the Company. He is a natural marketer, a proven business person and experienced restaurant franchisee. He has jumped right into his new role as a member of the board's marketing committee and here in the building, meeting with members of the Papa John's team.

Over the next several months, we will work together to build a plan and platform for him as an engaging and authentic ambassador for the brand. Prioritizing people has been a key strategy pillar for the Company for the last year, and it's an area where we made substantial progress last quarter, above and beyond our partnerships with Shaquille O'Neal and our new chairman. First, the Company appointed strong new independent director in addition to Jeff Smith and Shaquille O'Neal. In February, as part of the strategic investment from Starboard, we appointed Anthony Sanfilippo to the board. Anthony has held multiple board and senior leadership roles in the restaurant, retail and hospitality industries, including most recently as the former chairman and CEO of Pinnacle Entertainment.

In March, we appointed two more highly qualified independent directors, Michael Dubin and Jocelyn Mangan. Michael is the founder and CEO of Dollar Shave Club. Jocelyn has held senior executive roles at Snagajob and OpenTable and currently serves as a member of the ChowNow board. In total, we have added six new directors in 2019 who together bring deep expertise and operational turnarounds, marketing, technology and product strategy.

We've also made big strides strengthen Papa John's senior leadership team, appointing Karlin Linhardt as our new Global Chief Marketing Officer, a position that has been vacant for 10 months. Karlin is a veteran marketing leader from a quick service restaurant category, most recently as Subway's SVP of marketing for North America. He previously spent 10 years in McDonalds, where he led initiatives critical to the brand turnaround. Karlin also understands the important role franchisees play and the needs of the franchise system. As a key part of our commitment to prioritizing people and the communities we serve, last quarter, we launched the Papa John's Foundation for building community. The Foundation's mission is to empower communities as they work together for equity, fairness, respect and opportunity for all.

We're excited about this initiative and the announcement of our first brands. We have 800 franchisees and his business owners many are long term pillars of their communities. It was a natural step to create a company foundation that can support better lives and better communities nationally on behalf of our team members, franchisees and customers. Finally, we continue to rollout our diversity equity inclusion training across the country. We had a near 100% completion rate for our corporate campus and restaurant field management team members. We are currently deploying the training to our franchisees at no cost to them. We will train restaurant level team members starting in Q3.

Turning now to the work we are doing to improve Papa John's customer proposition, including our brand differentiation and accessible value. As you've heard us say, better ingredients better pizza is a truly differentiated marked position that resonates strongly with all consumers, yet our creative has underplayed this attribute in the past. Instead, we have focused on limited time products, loyalty and promotions, without providing a point of access where our quality products are available to everyone. This is essential to bring new customers to the brand and drive overall value perception.

As our new CMO, Karlin's top priority is to advance and execute our creative strategy and marketing spend, so that we better connect with our customers around both quality and accessible value without sacrificing one for the other. Karlin's completely aligned with his strategy, following on his deep experience in the industry. He's only been on the job six weeks but is already laying the groundwork to begin executing against it. We look forward to providing more updates later in the year.

As we added a strong CMO to the team, last quarter we also made tangible progress improving key elements of the customer value proposition. First, we launched six new specialty pizzas, which have proven to be a very successful component of our brand differentiation strategy, at a $12 promotional price point. We are excited with your overall satisfaction metrics for the new handcrafted specialties. In conjunction with the specialty pizzas launch, we also simplified menus, removing lower performing pizzas across the system.

Second, we successfully tested a pricing structure with a balance of premium and more accessible price points. We are combining a $12 introductory price point for the differentiated specialty pizzas with a $6 medium one topping price point that provides an entry point for new customers. Initial results have been very positive. So much so, we've extended our market testing with an additional $6 product offering.

Third, we continue to rollout our new Papa Rewards Loyalty Program, which is an important lever to drive our value proposition. Since the re-launch late in the fourth quarter of last year, we received favorable customer feedback and have launched several successful campaigns available exclusively to Papa Rewards customers, by enabling more personalized experiences, no matter where customers place their order. Papa Rewards allows us to better target promotions, driving sales and customer satisfaction without sacrificing perceived value or brand differentiation, which can happen with blanket promotions.

In the short-term, as we have discussed in the past, the transition to the new loyalty program has caused some softness on ticket, driven primarily by richer customer offerings, new programs trials and consumers cashing out legacy rewards. We're optimistic that after the initial shake out, the new Papa Rewards program will continue to grow and become a key contributor to Papa John's performance and customer value proposition.

Next, I'd like to discuss the progress we're making to strengthen long and near-term unit economics, beginning with technology and delivery, an area of tremendous focus in our industry. While our partnerships with aggregators today are in their infancy and constitute a small portion of our total orders, we continue to explore the potential opportunities we believe aggregators may represent as an incremental sales channel. Our strategy has been and continues to be customer driven. We are committed to testing and learning whenever we have an opportunity to meet customers where they want to meet us. That was Papa John's philosophy when we launched first online ordering in the pizza industry, and it continued so today.

We also want to build upon the strengths of our direct-to-customer delivery experience. Leveraging last year's major mapping upgrade and our leading Papa Track ordering tracking platform, we now have new technology in several 100 corporate and franchise restaurants that enables customers to visually track their delivery on a map. For the first time, Papa John’s customers can see exactly where their pizza is in real-time.

In addition, the Papa track capabilities provide detailed metrics and enhanced insights regarding the delivery drivers' time and motion. This is yet another example of how Papa John’s continue to lead using technology to improve through the door delivery times, drive better customer experiences and increase our drivers' safety .

While we invest and lay the ground work for the long-term, we're also focused on the near-term challenge to restaurant unit economics, which are primarily been sales related. Here this solution is also sales related, which is why we are so focused on rebuilding the brand and better communicating its differentiation and accessible value as I've discussed. As we work to improve same-store sales and reduce unit costs, we continue to support our franchisees' experiencing unit economic pressure. Last quarter, we provided nearly $5 million of royalty relief to all domestic traditional restaurants, and have committed to support our franchises with royalty relief and contributions to increase the marketing in Q2. Beyond, we will assess our franchisees' needs and provide relief to mitigate restaurant closures accordingly.

Lastly, I'd like to provide an update on our international business. As we've discussed before, our higher margin asset light international business is a key component of Papa John’s long-term brand strategy, and opportunity to build shareholder value. In fact, it is more than just the long-term promise. It already has a significant driver of the Company results, producing over $5 million of pretax income in Q1 with double-digit sales and restaurant unit count growth.

Ever since we launched our first international restaurant in Mexico City in 1998, our quality product combined with a concerted focus on ramping-up global development has yielded results. While it took 15 years to reach our 1,000 international restaurant milestone, it took just over five years to double our presence outside North America with restaurant number 2,000 opening in the Moscow last quarter.

Looking ahead of the 1,000 restaurants in our global development pipeline, 900 are international, another indicator of our growth opportunity outside of the U.S. Strong partnerships with our international franchisees are essential to our long-term success. We are optimistic about our improvement in franchise engagement in the Middle-East, following the sale of the UAE restaurants to a committed new partner.

Also last quarter, we sold the corporate owned quality control center in Mexico City to a key franchisee. Who's now become the master franchisee for the entire country, both developments are very positive for our outlook in Mexico. In Beijing, we are encouraged by the continuing growth and commitment of our partner who acquired our entire operation in Northeast China last June, including restaurants in a quality control center. In other international developments last quarter, we continued to see improvement in the UK. We also entered our 12th new country in three years with our first restaurant in Pakistan. This brings our brand to 47 countries and territories outside of the United States. Overall, our international business had a strong quarter.

So in summary, the first quarter was a positive start to fiscal 2019, marked by early wins, executing our plan and big steps building the strong long-term foundation. We have started to turn around the key drivers of our business, while we transform Papa John’s culture and realize the potential of our differentiated market position. As always, we remain focused on people and pizza. Speaking for Papa John's team members and franchisees, I am very excited about the opportunities ahead.

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

[Joe Smith, CFO]

Thank you, Steve. For the first quarter, we reported a diluted loss per share of $0.12 on a GAAP basis compared to diluted earnings per share of $0.52 in the first quarter of 2018. The decline in our earnings per share was primarily attributable to special charges and lower North America comparable sales. The special charges incurred during the first quarter totaled $15.9 million approximately $4.9 million included support to our North America restaurant through short-term royalty reductions for franchisee.

In addition, we incurred expenses of $5.1 million associated with activities of the special committee of the Board of Directors, including legal and advisory costs, culminating in the recent strategic investment by Starboard value. Finally, there was $5.9 million one-time non-cash mark-to-market adjustment related to the Starboard and franchisee option to purchase Series B preferred stock culminated in the additional purchase of $52.5 million of preferred stock in late March.

Excluding these special charges, we reported adjusted diluted earnings per share of $0.31 on a non-GAAP basis compared to $0.52 in the first quarter of 2018. Our first quarter pre-tax loss on a GAAP basis was $800,000. Excluding the impact of the previously disclosed special charges, our first quarter pre-tax income was $15.1 million, compared to $23.1 million for the corresponding quarter in 2018.

Also in the first quarter, the Company began to consolidate the financial results of the Papa John's marketing fund, which is our national marketing entity to which all domestic restaurants contribute fund. In this afternoon's earnings press release, the financial results for the prior year first quarter have been restated to provide comparative results.

We also filed an amended 2018 10-K this afternoon, reflecting our plan to change internal controls to address any future consolidation issue of variable interest entities similar to the national marketing fund. The consolidation of the national marketing fund is not expected to have a material impact on the Company's annual consolidated financial results for 2019 or future years, including pre-tax income as the fund operates at or near breakeven results annually.

Now looking at sales, consolidated first quarter revenues decreased $51.8 million or 11.5%, primarily driven by lower comparable sales for North America, which impacted our company-owned restaurant revenues, lower royalties and decrease North America commissary sales. In addition, the re-franchising of 62 company-owned restaurants in North America during 2018 reduced total company owned restaurant revenue by approximately $11.5 million as compared to the first quarter of 2018. International revenues also decreased due to the re-franchising of our company owned operation in China.

Now turning to business unit margins for the quarter. Domestic company owned restaurants' operating margin decrease approximately $4 million or 0.6% as a percentage of related revenues, primarily due to the impact of lower comparable sales partially offset by favorable commodities cost and favorable insurance costs. North America franchise royalties and fees decreased $7.3 million as compared to the first quarter of 2018, reflecting the previously mentioned $4.9 million of short-term royalty reduction granted to our North America franchisee and $2.4 million related to negative comparable sales.

North America commissary operating margin increased $300,000 or 0.7% as a percentage of related revenues. As the lower North America sales volumes were offset by favorable commodities costs and reductions in certain operating costs including labor. Our international operation margin increased $300,000 primarily due to higher royalties from increased equivalent units partially offset by the unfavorable impact of foreign exchange rates.

For the first quarter, G&A costs increased $11.1 million primarily due to the previously mentioned special charges up $10.7 million, including $5.1 million of legal and advisory fees, and the one-time mark-to-market adjustment for the options valuation of $5.6 million.

Net interest expense increased $1.2 million do an increase in interest rates as compared to the first quarter of 2018. Total debt outstanding was $380 million as on march 31, 2019, which was a reduction of $245 million from our 2018 yearend balance. The decrease in outstanding debt was primarily from the issuance of Series B Preferred Stock to Starboard.

We continue to expect an annual tax rate in the range of 21% to 24%. Our free cash flow which is a non-GAAP measure that we defined as cash flow from operations less capital expenditures and less dividend payments to preferred shareholders was approximately $3.1 million for the first quarter, as compared to $27.4 million in 2018.

The decrease was primarily due to the previously mentioned special charges impact of consolidating the national marketing funds and other unfavorable changes and working capital items. During the first quarter, we adopted ASC Topic 842, which requires companies to recognize a right-of-use asset and a lease liability on the balance sheet for contracts that meet the definition of a lease.

The adoption of this accounting standard resulted in the Company recording and operating lease liability as of March 31, 2019 of approximately $157 million. There was no significant impact on our operating results or covenant calculations from the adoption of this new accounting standard.

For the first quarter, we opened 27 restaurants in North America and closed 28 units for a net reduction of one restaurant. We also opened 49 international restaurants and closed 15 units for a net increase of 34 units.

We paid a cash dividend of $9.1 million to our common and preferred shareholders during the first quarter of 2019. Subsequent to the first quarter, on April 30 2019, our board of directors declared the second quarter cash dividend of approximately $10.6 million to be paid to common and preferred shareholders.

The second quarter common stock cash dividends will be $0.225 per common share. As noted in the earnings press release, the Company is reaffirming its previously issued 2019 outlook as we expect the initiatives we are implementing to improve results in the second half of 2019.

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

[Steve Ritchie, President and CEO]

Thank you, Joe. With a solid start to 2019, I'm very encouraged by both our day-to-day progress driving incremental improvements in the drivers of our business, as we simultaneously build a strong long-term foundation for our differentiated market position is the better ingredients, better piece company.

I would also like to take this opportunity to thank our terrific franchisee partners and collectively all of the team members in the Papa John's family. We appreciate all the passion and dedication to the brand. 2019 is shaping up to be an exciting pivotal year for the Papa John's brand. I look forward to providing more updates over the course of the year. As always, we appreciate your continued support.

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

[Operator]

Thank you. [Operator Instructions] Our first question comes from Will Slabaugh of Stephens Inc. Your line is open. Please make sure your phone is not mute.

[Will Slabaugh, Stephens]

Yes. Thanks guys. Sorry about that. It sounds like you're pretty pleased with the market improvement that you've seen over the course of the past few months. So I was wondering as you look back, if you would equate most of that to, to the changes you've made in the messaging around $12 in specialty and trying to differentiate the brand that way or some other reasons. And then just in general given your commentary around anticipation of improvement in the back half, if we should continue to expect sort of steady improvement quarter to quarter 2019 rolls along?

[Steve Ritchie, President and CEO]

Sure. Will, it's Steve, thanks for the question. So, yes, I mean, I'll go back a bit. So just thinking about sequential quarter improvements, so if go back to quarter three of last year, we were down 10, made improvement in the fourth quarter to down eight and then down for 6.9 in this first quarter. And as we know as we previously reported, we did experience some outsized pressure in January down 10.5% for the full month. So, I'll just call out a couple of those factors because it does play into what showed some strength throughout the rest of the quarter and why we believe there'll be sequential improvement as you look at the trailing quarters.

So again, the launch of the Papa rewards program although we know it -- the long term potential for this program is going to be significant for the brand. It did have significant pressure from the conversion, coupled with the two promotional activities that we did have in January. That of course being the free cheesesteak that was to garner additional membership, which was quite effective in gaining new members into the new loyalty program, which we know once again will, will continue to add new customer growth, which also drop frequency, which we believe is also going to be more profitable margin for the brand.

That coupled also with the two mediums for $6. So, the combination of those three things provided some outsized and we were able to stabilize the business in February and March to more normalize check. But as you stated, we did -- we were very pleased with the $12 specialty pizza promotion, launching the Philly Cheesesteak in February and then launching the 16 Handcrafted Specialty Pizzas in March 1st focusing the efforts on Meatball Pepperoni.

So, I think we found a good balance of that being on the equity side, the brand differentiation talking about quality, but also having a value layer there with our loyalty program. But we also introduced our $6 medium one topping carryout promotion wasn't national mainstream advertising, but it did play a part on the digital side of our business. We saw nice traffic growth providing net accessible value as we try to work through the balance of the high low side of our proposition to the brand.

So overall, pleased with the quarter given the fact that we did start off in a bit of a rut, there in January. So, we saw some nice improvements. And yes, we do have an expectation of some sequential improvements throughout the quarters. And as we did reconfirm our guidance on the full year of negative one to negative five, we still got some challenges here. We got a brand new CMO that just been on board here 6 weeks, so given him sometime and opportunity to assess the opportunities and the levers to improve the business.

The only other thing I would highlight Will is that I think plays a factor and that is the consumer sentiment improvement that we'd experienced in the quarter with a number of initiatives that we've been doing really, frankly, for the last six months for the efforts to diversity, equity, inclusion on the training. The diversification of our leadership team, completely new leadership team for the most part, the efforts that we did with the Starboard value that announcement, I think providing a lot more confidence and clarity to the team members. And then obviously, it has a correlation to the brand.

The announcement obviously of Shaquille O'Neal was very exciting for the brand internally. But I think from a consumer standpoint, we saw direct correlations to sentiment improvement directly after that announcement. And last but not least, certainly something I'm very proud of, is the efforts to launch the very -- the first ever Papa John's foundation and making a number of grants that we think we're very meaningful grants, making a real difference in the communities that we serve. And we're very much in the infancy of what we believe will be real meaningful opportunities in the future with this foundation. So, we collectively think a number of things that made up our quarter, which is where, we get optimistic around the output, as we look at the rest of this year.

[Will Slabaugh, Stephens]

And why don't you talk a little bit more about that partnership with Shaq, obviously, it's coming on board of directors and taking on the role of franchisee and also brand ambassador. Can you talk a little bit more about timing of the ambassador role? What that message might be like and kind of I guess expectations around that, that partnership in general?

[Steve Ritchie, President and CEO]

Sure. I mean, obviously, role in the advertising piece is something our new CMO, Karlin Linhardt, is working on now to understand, assess the potential opportunities and the creative ideas that are working on that in real time. And I'm very excited about some of the opportunities that already been brought forward. In terms of the timing of that, TBD, what I will say that is already -- Shaquille is already very engaged in the board and making an impact on the Company, not only in his industry advice and ideas to what we might be doing strategically, in the areas of marketing, store design, operations, things connected with the consumer impact of the foundation. It was just at Morehouse College just this past Friday and helping us made connections with the historical act colleges and opportunities as well. So very broad in his reach and very tactical in his efforts and spent a lot of time in engagement and those things as we build up to the opportunities as it relates to the advertising.

And lastly, the franchise opportunity, I'm not going to say, that's not a big opportunity as well. I mean, I got involved in a joint venture there, and really 9 very strong restaurants there in South Atlanta. We think that's very exciting. Thinking of grab a lot of interest from the outside to go around additional outside franchisees coming to interest in the brand, but it's also garnered a lot of excitement from our franchise base to somebody like Shaquille O'Neal that's been involved that's been involved in a number of other brands and that would have the interest to join the Papa John’s brand. So a number of things in notion Will is as I'll tell you. We will keep you guys updated as we kind of work through final decisions as relates to the brand ambassador piece.

[Operator]

Thank you. Our next question comes from Peter Saleh of BTIG. Your line is open.

[Peter Saleh, BTIG]

Steve, I think, can you talk about the cadence of the comps throughout the quarter? But I think there was also some noise with the check and the impact of the check primarily in January. Could you just go back and give us a little bit of sense on what you saw more important on the traffic side? If you did see a traffic improvement as we went through the quarter and any sort of indication or any sort of color you guys can provide on maybe the quarter-to-date trends?

[Steve Ritchie, President and CEO]

Yes, probably say on Q1, Peter. But I think we saw stabilization in the check as we progressed from January to February and March, so we've seen some nice improvement overall along on the traffic side. The big improvements in the check from January, February and March and it's not because we're taking price or anything of that sort, it's really just more normalized stabilization of the promotions that we are doing very aggressive combination or promotions. And we knew that once we did the original conversion to the new loyalty program that we would see a hot burner rate just from the initial conversion allow the marketing noise about the program.

But now we're seeing very positive trends coming from the program, more stable overall check. We did know this was a richer program then the prior program and that was by designed and intend to drive frequency. This becomes a loyalty layer replaced some of the more deeper discounting that we did on things like 50% off, so being lesser reliant upon unsustainable tactics like 50% off and being more reliant upon long-term strategic sustainable initiatives like the loyalty program.

So, we're excited about we got overall here, but one thing again it is going to take some time to give you overall sales moving back in the right direction because we do still have -- even though, we have solid sentiment improvement quarter-over-quarter, still we're not back to the same sentiment levels prior to November of 2017. But those are good leading indicators of sales coming especially once we get some of the marketing pieces in order that Karlin will be working on here as we speak.

[Peter Saleh, BTIG]

I know I think you've hinted a little bit the value preposition you guys are intending to launch with the $6 medium one topping pizzas. Any other sort of items you are considering at this point in terms of adding to the value preposition? And when should we expect to see that become more of a national launch?

[Steve Ritchie, President and CEO]

Sure, Peter. It's Steve and Mike might jump in as well. So, we do have various test that are happened in the local markets, but the corporate and franchise markets are like some of those things are tied to a price point that seems to be resonating on a consumer side that we've done a lot of testing and research. That price point seems to work both on unit economics but also gives us a good value preposition to the consumer. Some of those local market tests, we got to make sure that they're scalable, they're sustainable. So I'd say TBD just in terms of timing on where some of these things might become national, but not only are they on the price side.

But some of these things are tied to additional products as you are aware, we have had sandwiches that have been out in the marketplace for while and test the reason that why they have not launched nationally yet as we're trying to measure the level of instrumentality for things to be sustainable on the menu to drive overall healthy traffic and profitability growth. But, Mike, I think, we probably had a lot of it there, but only any color that you would add to what we're doing there in $6 piece.

[Mike Nettles, Chief Operating and Growth Officer]

So, Steve, I think you've covered it well, and Hi, Peter. I think probably the two things we would throw out to, as you well know, and we've shared in the past. We made heavy investments in 2018 and customer understanding market segmentation, customer needs assessment, customer journey mapping, all the way through even looking at our own day part opportunities from early dinner afternoon snack lunch, even late night. And one of the things that we've learned is that those value propositions do tend to run different behaviors based upon customer needs today.

So for value seeking customers, it's a great way to use them as a customer acquisition tool. And that was a big part of our $12 strategy. We had 6 and 12, 6 to bring them in 12 to trade them up. That's a fairly common strategy, but we really use the data to help drive that and use the customer acquisition tool of the $6 value proposition to bring them in and tour them throughout the menu. And then that's really helped on our check pressures and being able to build it back up to very good value said, we're very comfortable with.

But likewise, we've learned a lot of things with sandwiches and some other items we've been testing and know more about what different needs are out there. And so we're using that data to really inform a lot of our product innovation. It's too early do to do anything at a national level yet, but they're certainly testing this underway right now and other products both existing on our menu or potentially some line extensions from the menu ingredients themselves that could really lend themselves well to further customer acquisition tools.

I will also one step further, we found out with a lot of the value proposition items even though they may have been out there as a customer acquisition tool with the right marketing and the right digital targeting of that marketing. They're great sides for up sell. There's some really unique opportunities there with existing products, as Frank, I just something in the past, we've necessarily positioned as well as we could. And you're going to be seeing us do a lot more of that, now that we're a quarter smarter and where we know a lot more about what our customers are wanting.

So stay tuned, but we're using all that data to good use, and it's really helping to drive an awful lot of our product innovation for the remainder of this year.

[Peter Saleh, BTIG]

My last question is on the marketing fund. Remind me to do that, if you contribute to the marketing fund at the first quarter and how do you plan to or essentially, are you planning to increase your marketing contribution as we go through the year?

[Steve Ritchie, President and CEO]

So, Peter, it's Steve. So, on the back part of that question first. So, we do have a 4.75% national marketing fund contribution rates that took effect in January of this year. We do not have a plan to increase the contribution rate until next year. There is a plan to increase to go up by another quarter point next year at this stage of the game. On the contribution, so we did make a $10 million contribution into the national marketing fund last year. And we've also made a smaller contribution in the second quarter to the national marketing fund to continue supporting our franchisees and we're continuing to evaluate.

Obviously, the proceeds from the Starboard investment of $250 million, was to provide us with the financial flexibility to make the right decisions to make investments into the business to improve the overall unit economics. So that's, the role that our new CMO is taken on here is to really assess all the initiatives that are under review at this point. A lot of things are in tests that Mike was just alluding to there, and then what we're going to measure the things that are going to give us the highest rate of returns. But we did make a small investment in second quarter, we'll be continuing to evaluate potential additional investments as we work throughout the rest of this year.

[Operator]

Our next question comes from Alex Slagle of Jefferies. Your line is open.

[Alex Slagle, Jefferies]

Thanks for the question. Domestic store openings in the first quarter were a bit higher than we would have expected, actually hadn't seen that levels openings in the first quarter since 2013. And you also only closed about 28 North American franchise units in the first quarter. So that's down a bit from the third and fourth quarter levels. So just wondering if there are any one time thing we should think about, as we look out through the rest of '19? Or I guess any other color appreciated on that front?

[Joe Smith, CFO]

Hi, Alex this is Joe Smith. We were pleased with our first quarter results and unit openings. So again, we had quite a few domestic stores that did open and I think we found certain places that the franchisees still see opportunities for success. And so you saw that, and as you said, on the closing side, make some good progress as we continue to work with our franchisees, you know, both specifically and working through different situations to provide assistance where needed. And so we want to continue to do that. But we know we still have some still have some work to do. So that's why we kind of get the guidance as is. And we kind of see how as we go through the rest of the year and update it accordingly.

[Steve Ritchie, President and CEO]

And Alex it’s Steve, I’d just add, I think Joe did it well there. I think this really is an example of showing the confidence in the brand now. So I think, on the opening side that despite all the challenges we've had over the last year, there still is a high level of interest to open the units from existing franchisees and new franchisees from the outside. And Joe leads the development team. Has really done a nice job to bring in new franchisees. And the other side of it, on the closures, I think we have made a lot of right decisions to support the franchisees with a level of financial support that has mitigated some of the closures. We do know that we're going to continue to have some challenges as we progress throughout the year here to mitigate closures.

Last year, we had an outsize number of closures on the non-traditional side that we do not anticipate to occur for this year, that is worked into our guidance, but it was a nice start for us this year in the first quarter, because we did expect to see the potential for higher numbers of closures in the first quarter than what we experienced.

So we'll continue to monitor that work with our franchise partners and continues with one of our pillars and focuses unit economics and with the unit economic strength obviously that helps on mitigating closures and also increase in unit openings.

[Operator]

Thank you. Our next question comes from Alton Stump of Longbow Research. Your line is open.

[Alton Stump, Longbow Research]

Great, thank you. Good afternoon. I just want to follow up on the closure. Could you remind us what percentage, kind of ballpark of closures last year were in the non-traditional format. And what percentage of -- as rest of the year [indiscernible] do you think will come in the same format as we saw last year?

[Joe Smith, CFO]

I think we had about 62 non-traditional closures last year of our total so that, again domestically we had the closures that we had --so, again I think we had about 190 closures last year and 60 of them were non-traditional. So that kind of gives you the percentage. So, we think we can have a lower number this year as long as we continue to work with the franchisees and some of the work that we're trying to progress through for this year.

[Alton Stump, Longbow Research]

And then one more, I’ll hop back in the queue. I guess, a bit of a general question, but what is the mood right now of franchisees? Obviously it's been up and down last two quarters but you’ve had some positive announcements. Are they feeling a lot better since the Shaquille announcements or any change and kind of, so how they're feeling?

[Steve Ritchie, President and CEO]

It’s Steve again. I think in general, yes, there was definitely excitement around the Shaquille announcement. It was unanimously supported by the national marketing fund board that is made up of franchise partners and folks from the Company alike. So that was nice to get that support. At the same time, we know until we can get sales back to positive, this is a company that experienced 14 consecutive years flat to positive sales growth. So we're not accustomed to sales declines with a brand as strong as Papa John's. So sales declines creates unit economic pressure and we've attempted to prod bridge solutions to support our franchisees but the royalty abatements and reductions that we have provided have not made franchisees whole. And I’m a franchisee as well and I'd like to get back to where I was prior to the issues in late 2017.

So, we're working together with our franchisees to find the best path to be able to do that. That means that we do need and find the right investments. This is why we landed on the investment with Startboard. The money coming in and the leadership and experience and track record of somebody like Jeff Smith, it has also built a new composition of directors on the board here that has a skill set and capabilities to know how to really assess and help the management team and guide us to make the right decisions to where we might invest to turn the businesses as quickly as possible.

But we also want to be very smart about what we do here. It's got to be a sustainable solution, not something that's a short-term lift. So that's why we continue to say it's going to take some time. As I said before, these things traditionally take 12 to 18 months, and we're not even a 12 months from our second big event that has caused some significant decline. So, overall, I think a good partnership with the franchisees, clearly, if you're a franchisee and you're making less money than you were making before, you're not going to be as happy as you might have been in years in the past, but we're working together to find the right solutions.

[Alton Stump, Longbow Research]

Great very helpful. Thank you, Steve and Joe.

[Operator]

Thank you. Our next question comes from Chris O'Cull of Stifel. Your line is open.

[Chris O'Cull, Stifel]

Thanks. Good afternoon, guys. I wanted to see if you could clarify just a response to a prior comment you made about sequential improvement in the comp. It sounds like you expect sequential improvement in the second quarter, is that correct?

[Steve Ritchie, President and CEO]

That's a good question. It's Steve. I mean I think when we set the roadmap for this year we did expect sequential quarter improvement. And each of the quarter is based on our roadmap ahead. I'm not saying it's a material number from a quarter-to-quarter basis, if you break down each of the quarters, I'm not going to get into specific each quarter versus the other. But yes, the answer to your question, in short, as we do we do expect some improvement.

I'm not going to get into the actual performance through April here, but our expectations remain the same. And that ties back to our full year guidance at this point in time. So not seen any major significant move. It would indicate that we needed to change the full year guidance, but at least give us optimism that we are still on that roadmap here. But, we obviously have done a lot of things here in the last several months that we can get everything moving in the right direction. There's real opportunities to even outpace our goals things start moving in the right direction quicker.

[Chris O'Cull, Stifel]

And just from the first quarter -- looking at the first quarter. Did you see meaningful sequential improvement in the transaction performance? Or just the nominal comp?

[Steve Ritchie, President and CEO]

I'd say there was a material number of amount of improvement as you look at some of the performance in the mid of January there to balance it out February and March, Chris. But the majority of it yes to your question was in, in check average improvement, because there was just so much check pressure. We are rolling over a higher check average increases from last year, as we experienced declines in the fourth quarter '17. We did see some reductions and discounting and even some menu price increases coming out of the year last year.

So we're rolling over some of those things, which did cause some changes in the balance of our 2 years stacks as it relates to check trends and transaction trends. So got to kind of watch out some of the numbers in the first half of the year. And we're just kind of look at this thing on a multi-year basis. But priority number one has been, always will be, this is a traffic business. If you can't grow traffic, you're not growing market share. And we don't believe you're putting yourself in a sustainable position to grow. So we're monitoring traffic is a priority number one, but also monitoring ticket to ensure that we don't have too much take rate on the pricing side, because that has a negative impact on the traffic.

[Chris O'Cull, Stifel]

And then you mentioned a small contribution to the national ad fund in the second quarter. Is the National advertising fund flatter down year-over-year given the system sales performance?

[Steve Ritchie, President and CEO]

The contribution rate as a whole because of the quarter point impact, every quarter point impact is about a $7 million increase the national marketing fund. Obviously the revenues being down, there's not a significant change in the overall number on a year-by-year basis. But you got to take into account obviously the contributions that we made in the fourth quarter last year. And again, we've made a smaller contribution in the second quarter this year.

We continue to make contributions. The overall spend in the national marketing fund will outpace what we spent in 2018. Yes, but we have not yet made those decisions to make an investment or how much that investment might be. But we feel like we've got a healthy amount of dollars to spend in the national marketing fund to remain competitive, and of course to meet our sales guidance numbers that we put forth.

[Chris O'Cull, Stifel]

And then the commissary margin dollars improved year-over-year despite the meaningful decline in sales. Did the Company raise commissary pricing in the first quarter, or does it plan to raise prices through this year just to maintain that historic margin?

[Joe Smith, CFO]

Chris, this is Joe. There’s a couple of things, again, we had the commodities actually had decrease for a little bit of a fixed margin that you get on cheese, and we also had some price decreases. Also we had some improvement in labor as we talked about. The other part that does make an impact is on the external reporting. When you divest restaurants like we did last year, that'll make the reported margin for the commissary a little bit higher this year as compared to last year. So that's a little bit of just how the change in reporting that occurs from when you divest some restaurants, which again, if we need to take that offline and go into some more details, we can do that.

[Steve Ritchie, President and CEO]

Chris, I mean, thanks for the question, Chris. But I'm going to make sure that you understand the segment of the business. A very important segment of the business for us to ensure -- obviously, we, I know you're well aware, we manage the food service margin to an agreeable after tax margin to ensure that we're supporting our franchisees margins and profitability. By no means would we want to try to take incremental margins from the food service side of business, when franchisees, they can get every dollar they can get right now.

So we're continuing to invest and enroll to reductions and into marketing contributions but also maintaining its food service side with the exact same margin commitment that we've had for over a decade, I believe so. So we’ll manage the full-year with that number. You will see some ups and downs throughout the quarters in the food service side, but the annual number is managed directly to that target -- the aftertax margin that we've agreed upon with our franchisees.

[Chris O'Cull, Stifel]

And just one last one Joe. If you exclude the royalty relief in the first quarter, it looks like the effective rate was around 4.2% which is below last year. Why would that be the case?

[Joe Smith, CFO]

Again we had some more -- as we've talked about specific royalty relief that we've granted to franchisees especially in some of the underpenetrated areas out in the far west and northeast. We've always identified those areas and gave some more specific assistance to those franchisees as we began this year.

[Operator]

Thank you. I’m showing no further questions at this time. I’d like to turn the call back over to Mr. Steve Ritchie for any closing remarks.

[Steve Ritchie, President and CEO]

Alright, thank you everybody for joining the call. I appreciate your continued support and we’ll continue to put forth great effort to keep the business moving in the right direction. We’ll talk to you again next quarter.

[Operator]

Thank you. Ladies and gentlemen, this does conclude today's conference. Thank you all for participation and have a wonderful day. You may all disconnect.