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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Good day and thank you for standing by. Welcome to the Papa John's Second Quarter 2021 Conference Call and Webcast. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions]
I would now like to hand the conference over to your speaker today, Mr. Steve Coke, Senior Vice President of Financial Operations, Accounting and Reporting. Please go ahead.
Thank you. Good morning, everyone. Joining me on the call today are; President and CEO, Rob Lynch; and our CFO, Ann Gugino. Rob and Ann will comment on our business and provide a financial update. After the prepared remarks, both will be available for Q&A.
Our discussion today will contain forward-looking statements involving risk that could cause actual results to differ materially from these statements. Forward-looking statements should be considered in conjunction with the cautionary statements in our earnings release and the risk factors included in our SEC filings. Please refer to our earnings release in the Investor Relations' section of our website for a reconciliation of non-GAAP financial measures discussed on this call. Finally, we ask any members of the media to be in a listen-only mode.
Now, I'd like to turn the call over to Rob Lynch for his comments. Rob?
Thank you, Steve and welcome everyone to our 2021 second quarter earnings call. Q2 was a very strong quarter for the Papa John's system, despite ongoing uncertainty regarding COVID-19 in a global pandemic. This has been a very challenging time for all of us. Surges, vaccinations and now new variants continue to create a dynamic situation that requires continuous evolution of our business and every business model across the globe. Despite this environment, Papa John's has stayed focused on the same set of core priorities, keeping our team members and customers safe, delivering operational excellence, driving innovation across everything that we do, and accelerating global development.
We remain hopeful that this pandemic and the terrible impact it's had on people and communities everywhere will come to an end soon. But we're more confident than ever that Papa John's will be able to continue serving our customers and outperforming our industry regardless of the challenges that we face ahead.
I am proud to announce that we have now delivered seven straight quarters of global comp sales outperformance. Coming out of Q2, when we had to lap the initial global shutdown and commensurate surge in our business, we firmly believe that the foundations on which we have built this turnaround are built to last.
Looking system wide, global restaurant sales in Q2 rose 12% to $1.2 billion. On a trailing 12-month basis, Papa John's global restaurant sales exceeded $4.5 billion. North America comp sales rose 5.2% in the second quarter, as we lapped last year's record of 28% in Q2 2020. In particular, the continued strength of Epic Stuffed Crust, combined with the launch of Parmesan-Crusted Papadias in June drove strong customer acquisition and helped us retain many of the new customers that we acquired in 2020. Our innovation pipeline continues to be very incremental to both sales and profits.
International comp sales were up 21.2% on top of last year's 5.3% gain. We saw continued momentum in the UK, which is our largest international market, but we also gained across multiple other markets as we lapped temporary closures caused by pandemic related restrictions a year ago. In a measure of the brand's long-term growth trajectory, comparable sales rose 33% in North America and 27% internationally on a two-year basis.
AUVs continue to rise, now beyond the $1 million level in North America with much of that top line growth flowing through to the unit profitability. The brand has never been stronger. Our strategy is sustainably impacting every area of our business. Papa John's brand and highly attractive unit economics are generating increasing interest and accelerating restaurant openings among, both new and existing franchisees.
We added 55 net new units in Q2, on top of the 68 net new units that we added in Q1. The first half of 2021 was our strongest for net new unit growth in the brand's history. With 176 new units added to our system over the past 12 months, unit growth is becoming a bigger part of Papa John's system wide sales growth. And with strong development deal flow, as I'll discuss in a moment, we're on track for accelerating system wide sales growth in the future.
Quickly reviewing our financial results. Operating leverage on nearly 12% revenue growth drove substantially higher margins, profits and free cash flow in Q2. Adjusted EPS nearly doubled to $0.93 a share from $0.48 a year ago. We generated over $100 million of free cash flow in the first half of 2021, defined as operating cash flow less capital expenditures and dividends paid to preferred shareholders. This was a 50% from a year ago even as we increase strategic investments in our growth.
We're committed to implementing a balanced capital allocation strategy. Our priorities are investing in growth, maintaining a strong and flexible balance sheet and returning cash to shareholders to enhance returns. Last quarter, we completed the transaction to repurchase and convert all of our Series B preferred stock. The transaction was a milestone in Papa John's transformation since 2019, when those shares were issued. This transaction was possible because of our strong financial performance over the past two years.
Now, with a more simplified and optimized capital structure, we are able to create even more value for our shareholders as demonstrated by the 56% increase in our dividend that we announced this morning. And we'll discuss our progress in all areas of our capital allocation strategy in a moment, along with more detailed financial results. But now I'd like to spend a moment providing an update on our strategic plan and outlook.
Papa John's innovation strategy touches all aspects of our business. Menu, technology, customer experience, delivery and development. Through careful execution, we're successfully achieving consistent share gains and comp sales' outperformance, expanding our customer base and growing our global footprint. Each quarter of positive results adds to the brand's momentum and our optimism about Papa John's near and long-term growth outlook.
With regard to our menu, we continue to see the long-term benefits of our strategy around creating premium differentiated new menu platforms. Carefully balanced with investments and quality on our core menu items and compelling LTOs. Our new innovation platforms like Papadias and Epics Stuffed Crust are built to sustainably grow our business. Nearly eight months after its launch, Epic Stuffed Crust continues to be a huge success with customers and avid pizza lovers in particular. Our biggest new product platform ever, Epic Stuffed Crust drove a significant increase in ticket and customer traffic in both Q1 and q2.
In June, we launched Parmesan Crusted Papadias which are premium item priced at $7 compared to original Papadias at $6. This segmented pricing strategy allows consumers to self-select into a premium product, while still maintaining the value proposition that the original Papadia offers. As we have said, the entire Papadias platform has proven to be largely incremental to our core piece of sales. Papadias are often purchased as an add-on to what would traditionally be a pizza-only order, without adding much complexity to our stores. In the second half of 2021, we expect Epic Stuffed Crust and Papadias will continue to be a foundation for our sustainable growth plan.
Turning to our digital innovation. Last quarter, our Papa Rewards loyalty program reached a major milestone, growing to over 20 million members. This is an increase of more than 5 million members since Q2 of 2020. Papa Rewards' members now represent approximately half of all sales. This is a very valuable segment of our business. We're able to directly engage these loyal customers with targeted, personalized offers that drives higher frequency, higher ticket and higher satisfaction. As a result, they're significantly more profitable than non-loyalty customers.
Proper Rewards members continue growing as we now give our customers even more reasons to join our loyalty program, like early access to new products. The launch of Epic Stuffed Crust and Parmesan Crusted Papadias were both proceeded by member-only access acquisition programs, and we saw significant increases in signups. Since the beginning of the year, we have added nearly 500,000 new Papa Rewards members per month.
Papa John's was the first national pizza brand to offer online ordering. And we've maintained a long history of innovating around our customers' digital experience. Our category-leading partnerships with third-party delivery aggregators is one key aspect of this strategy. In June, we integrated Grubhub into our system, adding to our existing national partnerships with Uber Eats, Doordash and Postmates.
Our goal has always been to make our products available wherever our customers want to purchase them. This continues to be a winning strategy with respect to aggregators. As these partnerships bring additional customers to the brand, they drive incremental and profitable transactions. Our partners also benefit as we provide substantial scale and order flow for their platforms. Our domestic sales through these channels grew almost 50% in the past 12 months.
These great results directly benefit our unit level economics. As I previously indicated, AUVs have grown above $1 million in North America on a trailing 12-month basis. It has been reported widely that the restaurant industry faces headwinds from commodity inflation. We've seen this in our business as well. But we believe Papa John's has two advantages in our ability to manage these input costs.
First, we operate a vertically integrated supply chain which allows us to continue to find areas of productivity and reduce cost. Second, we believe that our premium brand positioning gives us more pricing power, should we determine we need to take that path. Both give us more room to manage and offset external cost pressures, while continuing to deliver quality and value to our customers.
Papa John's unit growth and development activities are taking hold. In 2020, we consistently stated that we were building the foundation to significantly accelerate development growth in 2021 and beyond. Today, we're pleased to announce that in Q2, our global new unit growth set a company record. Our new development team in infrastructure have moved quickly to meet the dramatic rise in interest from well-financed and experienced franchisees, both current and new. Our franchisees are focused on investing capital back into Papa John's system, and the development strategy we put in place last year is bearing fruit.
This morning, we announced an agreement with our largest international franchisee, Drake Food Services International to open over 220 net new stores by 2025 across Latin America, Spain, Portugal and the UK. Drake is a valuable and respected franchisee and we're happy that this agreement will double their footprint by 2025. We're very excited about a number of upcoming domestic and international deals with new franchisees, who bring deep financial resources and operating experience. We see this as another important validation of the brand's promise and potential, especially given our enormous global development whitespace.
Now I'd like to address the current labor market, an area where we continue to act deliberately guided by our values to become the employer of choice in our industry through the compensation, benefits, opportunities and culture that we offer. In July, we announced new hiring, referral and appreciation bonuses for frontline corporate team members. We also made permanent, the expanded health, wellness, paid time off and college tuition benefits we rolled out during the pandemic.
Our franchisees are equally committed to supporting and appreciating their team members. After hiring more than 30,000 new positions last year, we continue our aggressive hiring plans to meet the needs of our growing business and customer base. Later this month, we're sponsoring a national hiring week, with resources for our corporate and franchise teams to showcase our unique culture and a fun way of welcoming new team members. We're very excited about continuing to grow the Papa John's family.
Based on the strong results we've announced today, our ability to execute our strategy and our optimism about the business, we want to provide some color on our outlook for the remainder of the year and beyond. For the second half of 2021, we currently expect to deliver low-to-mid single-digit comparable sales growth on top of very strong prior year results with year-over-year gains in earnings.
As for development, given last quarter's strong performance and accelerating interest from existing and new franchisee looking to invest in the brand, we are raising our global unit growth outlook to approximately 220 to 260 net new units this fiscal year. And we'll discuss our outlook in more detail in a moment. But the top line rationale for our confidence in our 2021 outlook is twofold.
First, after achieving record sales and acquiring millions of new customers over the last year, we have successfully held on to those new customers, and anticipate more growth in the back half of 2021. Second, after rebuilding our development team and achieving healthy AUVs and unit economics over the past six quarters, new unit growth and deal flow accelerated dramatically in the first half of 2021. And we see the momentum continuing for the rest of the year. With our optimism of Papa John's opportunity building every quarter, we are focused on ensuring that we have the team, capabilities and infrastructure to sustain our growth for the long-term.
I'll now turn the call over to Ann to discuss our financial results and outlook in more detail. Ann?
Thanks, Rob and good morning, everyone. As Rob described, Papa John's consistent positive trajectory since late 2019 has affirmed our confidence in the comprehensive transformation that we are executing. At the same time, it has significantly strengthened our financial position and long-term outlook. As I stated on my first earnings call with the company last fall, one of my top goals has been to align our balance sheet and long-term capital allocation priorities with the businesses improving growth trajectory, cash generation potential and investment opportunities.
Our capital allocation priorities are straightforward. First, to invest in strategic accretive opportunities to grow the brand and its long-term profitability. Second, to maintain a strong and efficient balance sheet that provides optionality and security and third, to enhance long-term shareholder returns by returning capital exceeding the needs of our other priorities. I'm pleased with the progress we've made against all three areas.
Since January, we have substantially increased our growth investments in new store development. We expect our first tranche of company-owned restaurants to open in September, with more expected in the fall. As we have discussed, not only our company-owned stores, high return investments in themselves, they also create optionality and we seek out prospective and current developing franchisees to open up in new territories and accelerate our development growth.
Our strategic growth investments have also included new customer-facing technology as well as our long-term innovation and development capabilities, including our new office in Atlanta, which we expect to open this fall. We have maintained a strong balance sheet. This has provided an essential foundation as we navigated the pandemic, ensuring we had the liquidity and cash necessary to meet the strong surge in demand.
In May, we simplified our balance sheet by retiring all the shares of our Series B convertible preferred stock. The transaction lowered our cost of capital and benefited long-term free cash flow and earnings, while only minimally increasing our leverage. We have continued to return significant capital to shareholders. In total, we have invested nearly $240 million in dividends, share repurchases and retiring the Series B stock over the past four quarters. As part of the Series B transaction, we also repurchased approximately one-third of the shares on an as-converted basis, further enhancing long-term earnings and equity value for our common shareholders.
As a next step, today, we announced we are raising our annual dividend from $0.90 to $1.40 per share, a 56% increase. After another quarter of outperformance, we are taking this action consistent with our confidence in Papa John's future as well as our commitment to a balanced approach to enhancing shareholder returns. I find out that the implied cash outlays of the increased dividend are funded largely by the elimination of the Series B dividends. And $1.40 per share, Papa John's dividend yield is now in line with the median for the S&P 500.
Looking ahead with our bank debt maturing in nearly a year, we are beginning the refinancing process, which is a natural catalyst for us to continue to look at ways to optimize our capital structure. Our goal is to maintain an efficient cost of capital with dry powder for flexibility to fuel future growth.
To summarize, we continue to be very intentional in our approach to capital allocation in the balance sheet. Over the past four quarters, we have taken substantial action to invest in growth, optimize our balance sheet and enhance shareholder returns. We look forward to taking further steps to evolve our capital structure to align with our priorities and new outlook.
Now let me turn to our financial results for the quarter. As Rob discussed, our record momentum continued in the second quarter of 2021. Our innovation strategy which is helping us retain customers and drive ticket growth, as well as the benefits of accelerating unit growth contributed to strong top line growth. Top line growth of 11.8% operating leverage and the expiration of temporary franchise support versus the prior year, more than offset commodity and labor pressures. Adjusted operating income rose 55% year-over-year and margins expanded almost 300 basis points.
On a segment basis, all of our strategic business units contributed meaningfully to top line growth as we surpassed the $0.5 billion in revenue for a second consecutive quarter. Operating income growth was driven by strong revenue on higher comparable sales and year-over-year unit growth domestically and internationally.
In North America, reduced franchise support provided for additional royalties of $5.1 million compared to the comparable period in 2020. Our restaurant operators continue to execute at a very high level, driving solid restaurant profitability and healthy AUVs in both North America and across international. In our company-owned restaurants segment, margins were relatively consistent with the first quarter, but down slightly versus Q2 of 2020, reflecting higher commodity and labor-related costs.
Continuing with the P&L on a GAAP basis, we recorded a loss per diluted share of $2.30 in Q2. This included one-time cost of $3.15 per diluted share related to the repurchase and conversion of the Series B preferred stock, which I just discussed. In addition, we incurred net cost of $3.3 million pre-tax or $0.08 per diluted share post-tax related to our strategic corporate reorganization and new Atlanta Office plans we announced in September 2020. Excluding these special items, adjusted earnings per diluted share grew from $0.48 a year ago to $0.93 in Q2.
For the remainder of the year, we are on track for the cumulative one-time cost related to the corporate reorganization to be within our previously communicated range of $15 million to $20 million. As we said, we see these costs as an investment in both the company's innovation and top line growth, as well as in our long-term corporate efficiencies.
Now, I'd like to turn to our cash flow on balance sheet. Strong earnings again contributed to a dramatic increase in cash flow from operations in Q2 from $54 million a year ago to $65 million. Free cash flow in the first half of the year rose to $100 million versus $67 million in 2020. We ended Q2 with net debt of only $329 million, up $54 million from a year ago, reflecting cash and liquidity used to fund the Series B retirements, mostly offset by free cash flow.
During the second quarter, we paid a cash dividend of $10.4 million to our common and preferred shareholders. Subsequent to the end of the second quarter on August 3rd, our Board of Directors declared third quarter cash dividends of approximately $12.8 million to be paid to common shareholders. The third quarter common stock dividend is $0.35 per common share in line with the dividend increase I just described.
In the second quarter, we opportunistically repurchased 68,000 shares of common stock for $6.9 million or $101.20 per share, under our previously announced $75 million share repurchase authorization. To the end of Q2, a total of 116,000 shares have been repurchased under this authorization with an aggregate cost of $10.9 million, and an average price of $94.24 per share.
I'd like to wrap up by adding a few points to Rob's comments on our goals and outlooks. Based on our strong sales and operational momentum so far in 2021, we feel confident about delivering low-to-mid single-digit positive comp sales growth in North America in the second half of this year. We are also raising our outlook for unit growth to 220 to 260 net new units in fiscal 2021.
In the second half of the year, we expect to continue to deliver a year-over-year margin improvement, as we saw in the first half, those slightly moderated by three anticipated factors. First, we expect commodity and labor headwinds to continue in the near-term. Second, Q4 will last the end of temporary franchise support last year, so we will not have that year-over-year benefit. And third, in Q4, we will also incur expenses for our annual franchisee conference which was not held last year due to the pandemic.
On a sequential basis, I remind you that margins in the second half of the year are typically lower than the first half due to seasonality in demand and input costs. We expect a similar pattern this year, as well as the impact of the factors I just mentioned. On a full year basis, in fiscal 2021, we expect to deliver operating margin improvement between 200 and 300 basis points over fiscal 2020's 5.2%. For the longer-term, we are well positioned to continue to drive margin expansion.
This year, we remain on track for annual capital expenditures of $65 million to $75 million focused on new store development, as well as new technology and productivity enhancements in our restaurants and across the system. I want to close by saying how very proud I am of the progress that Papa John's team has made unlocking the brand's growth and delivering long-term value for our shareholders. We are very excited about our future and look forward to updating you on upcoming calls.
I'll now turn the call back over to Rob for some final comments. Rob?
Thanks, Ann. For another quarter, I couldn't be more proud of our team and what we're achieving. As I said last quarter was a milestone for Papa John's on a journey of transformation that began two years ago. On a very different position today is demonstrated by 33% two-year comparable sales growth in North America and 27% internationally, and by record unit growth in the first half of this year. But the strategy, values and mission behind that growth haven't changed. This is what gives us all such confidence in the sustainability of our progress and optimism about Papa John's long-term outlook.
With that, I'll turn the call over to the operator for Q&A.
[Operator Instructions] Our first question comes from the line of Alex Slagle from Jefferies. Your line is now open.
Thanks. Good morning and congrats with your North American volumes now up 33% versus '19 and I guess even more growth ahead. Just wanted to get your latest thoughts on your potential need to add additional Quality Control Centers in the next couple of years. And then separately at the store level, was very happy with the current levels of execution and speed in the restaurants and with the delivery times and there's anything you'd like to simplify or speed up or sort of other ways you can further leverage technology or best practices to kind of materially step that up further?
Hi, Alex, this is Rob. Thanks for the question. We actually have a fair amount of capacity remaining at our QCCs. We had built capacity prior to call it, 2018 and then with you know a change in the run rates on the business we had a lot of excess capacity which made the supply chain less efficient.
As the volumes have increased, our supply chain has gotten a lot more efficient, creating a lot of value for both us and our franchisees as our cost structure has improved because of the leverage and the fixed cost coverage. So we're in great shape right now from a supply chain standpoint. We don't anticipate any large capital investments necessary to continue to support this rate of growth.
In regards to the restaurants, we are investing a lot in the restaurants. I mean, you know, over the last two years, we've made significant investments into our company restaurants and have brought our franchisees along. We - if you recall, we invested in a couple pieces of equipment spinners and sheeters which are ways for us to make our dough and pound out our dough much easier and faster, which has increased our throughput, allowed us to be able to service these increased unit volumes.
And then we've also invested in things like Papa Call, which allow us to make sure that we answer every call, a big problem in the business model used to be on a Friday night, when you get busy. You know, you're putting people on hold and you lose those calls. We now have a call center that answers every one of those calls and no calls get dropped, that allows our team members of the restaurant to be able to focus on making pizza.
But we are looking at a lot of technology investments, ways to optimize our delivery capabilities, ways to optimize how our - how we interact with our customers. And you know, we're looking at automation and a lot of other things that continue to increase productivity and help us mitigate some of these challenges that we're seeing in the current business dynamic.
Okay, thank you for that.
Thank you.
Thank you. Our next question comes from the line of Eric Gonzalez from KeyBanc. Your line is now open.
Hey, thanks for the question. You know, congrats on the really strong development numbers in the first half of the year. It really looks like you're on a nice trajectory in terms of the salary net growth and this - the Drake Foodservice agreement seems like it's a major step in the direction. So, should we expect to see more of these types of partnerships in the months ahead? And do you have anything in the pipeline that you're excited about? Or anything you could share on that front? And that is regarding your development outlook. Can you split that out between North America and international? And with the uptick in your guidance, how much of that is driven by US versus international? Thanks.
So, on your first question, yes, we do have a lot of conversations happening right now, both with domestic and international, current and prospective franchisees, we're not going to disclose specifically what that means in terms of unit numbers going forward. But what I can tell you is that, two years ago, almost none of our domestic franchisees were talking about development. And now, almost all of them are.
And you know, if you recall last year, we talked a lot about building the infrastructure to support a sustainable, significant amount of unit growth as part of one - one of our key initiatives. And we built that infrastructure. Last year, we didn't build a lot of restaurants, because we were busy making sure that we have the tools that we needed to significantly increase not just the number of restaurants that we're building, but the number of net new restaurants. We want to make sure that the units are going into the right places and are successful.
I think, you know, this brand had fallen a little bit into a behavior where we'd open a fair amount of restaurants, we'd also closed a lot of restaurants, you know, with the improved unit volumes as well as our ability to identify better sites in real estate and help our franchisees set up restaurants we're anticipating a lot less closures moving forward, which will allow us to sustain, you know, high unit growth on an ongoing basis.
So, development is something that, you know, in Q1, we talked about, we were a little bit surprised by how many units we opened in Q1, we thought maybe it was a little bit of a lag from the pandemic, but that has continued and we're actually building momentum. So, our color that we gave today in the 220 to 260 range is indicative of what we think we can do on an ongoing basis.
And the split between international and domestic any color you can give on that?
Right now international is accounting for about 80% of the new unit growth this year. We think that that is about the ratio that we're looking for on an ongoing basis. We have a lot of whitespace globally. You know, we operate in almost, you know, right around 50 countries where our largest competitors are in over 100 countries.
So, we think that global unit development will be the biggest driver of our overall unit development. But, domestic development is absolutely accelerating, primarily with our franchisees, but we're also building some restaurants, we're going to open up some of our first company restaurants in a long time here in Q3 and we're excited about leveraging that strategy to give our franchisees insights into how they can fill in their markets in a productive and profitable way.
Thanks and congrats, again.
Thank you -
Thank you -
Thank you. Our next question comes from the line of Peter Saleh from BTIG. Your line is now open.
Great, thanks. Thanks for taking the question. Rob, I want to ask about the same-store sales outlook, you guys gave low single to mid single-digit same-store sales growth? Has that contemplated any impact from the new variant? Are you seeing any sort of impact from that? I recognize that's early days, but any sort of changes in consumer behavior as that variant has spread a little bit?
You know, Peter, it's a great question. We have been very diligent in trying to get granular on the impact of, you know, the pandemic on our sales. Obviously, Q2 and Q3 last year, we had a huge surge in business and that was, you know, primarily the result of the pandemic and the dynamics associated with that. But over the years, we've seen markets open up to large extent, we haven't seen a lot of drop off in our business.
So you know, we measure every market very closely to try to assess what the impact is going to be when things kind of “get back to normal”. And so, when the Delta variant came into play, you know, we were measuring those markets as well. And we're just not seeing a significant disparity between open and kind of more restrictive market.
So, that's what gives us a lot of confidence that when we do come out of this whole scenario and this dynamic that we're going to be able to continue [technical difficulty] the loyalty members and the amount of digital orders that we get allow us to track very closely the behaviors of our customers.
And we've been able to retain the customers that we brought in during the pandemic. And with the launch of Epic Stuffed Crust, we've drawn in a lot of really, you know, heavy PC users in this category. And we're seeing their frequencies and their ticket higher than what we've seen in the past. So, all of that gives us confidence that regardless of what the pandemic situation looks like as we move forward, we're going to be able to continue strong - to deliver strong results.
Great, thanks for that. And then just on the labor market. And I know there have been many states about half the states maybe even more at this point that have canceled or eliminated the federal unemployment benefits. Has that had any impact on your ability to hire? Or is the labor market and those states still pretty tough as well?
You know, the labor markets are tough everywhere. We have seen a - a little bit of an improvement in application flow and hiring over the last few months, as some of the states have changed their policies. But it's still a challenge. But you know, what I can tell you is that, we have been able to mitigate some of that labor challenge by utilizing our partnerships with the aggregators.
You know, we have been in markets where we've had a real tough time, particularly finding drivers, we've been able to offload some of our orders to our aggregator partners, which has really helped us to be able to deliver the kind of customer service that we needed in areas where we just haven't been able to hire enough drivers. So that's been a really helpful part of our partnership with the aggregators.
Great and congrats on the quarter.
Thanks, Peter.
Thank you. Our next question comes from the line of Lauren Silberman from Credit Suisse. Your line is now open.
Thank you so much and congrats. Well, it was great to hear about all the interests in the franchisees. Rob, in your conversations with new franchisees, how do they look at the investment opportunity at Papa John's perhaps versus in other franchise brands? And then in your conversations with current franchisees, can you expand on what you're hearing from them and how interested they are in growing and existing and taking - filling opportunities versus expanding into new markets?
Thanks, Lauren. You know, new franchisees are really excited about Papa John's - the opportunity of Papa John's for a lot of reasons. One is, you know, frankly there just aren't a lot of opportunities in other national beef players. So, if they wanted me in the pizza business and today, they're in the sandwich business or some other QSR concept, you know, Domino's and Pizza Hut have a lot of restaurants in most of their territories that are accounted for. You know, we have about half the number of units as our larger competitors. So there's a lot more whitespace that we can develop. And so, for franchisees that want to be in the pizza business, you know, we're the best option.
And with the unit economics - unit economics that we're delivering and the flow through that we're seeing from the growth in the top line, and then the productivity we've been able to create in a supply chain, you know, our EBITDA margins are at size they've ever been at the restaurant level. So, really excited about the level of interest in the new - in the prospective franchisee marketplace. And we'll be bringing more of that context and information here over the next couple of quarters as we've closed some of these deals.
In the current franchisees, as I referenced earlier, you know, what, two years ago, almost none of our franchisee - top 25 franchisees had development agreements in place and almost none of them were building. Today, we're having conversations with all of them. And we're going into each of their respective market and we're leveraging the analytical tools that we build to really find the opportunities for them to go in and build in their current markets and create more saturation there, which will allow us to reduce drive times, which will allow us to provide better customer service and allow us to, you know, take share of those markets. So there's a lot of excitement, both with prospective franchisees as well as our current franchisees.
Great. And if I just do a follow-up on the unit gross guide, 220 to 250 net new units this year and now near historic levels. As you look out over the next few years, any color on how you see that continue to ramp this up just in terms of magnitude?
Lauren, I'm sorry, having a little bit of trouble here. Can you just repeat that question?
Sure. So on the net new units, so 200 to 250 is pretty much at historical levels. So as you look over the next few years, any color on how you see that ramping up in terms of magnitude?
Yeah. I think there's definitely an opportunity for us to increase that run rate. You know, we still have a lot of untapped markets internationally. We have a - and frankly, we're underdeveloped in markets that we're already in like China and even in the UK, our largest international market. So, we would, you know, we would be looking to continue to grow the number of restaurants that we're able to open up over the foreseeable future.
Great, thank you guys so much.
Thank you.
Thank you. Our next question comes from the line of Alton Stump from Longbow Research. Your line is now open.
Great, thank you. Good morning. You know, just want to ask, you know, on labor front, Rob here in the US, you know, I would presume that the tight labor market is, you know, probably difficult to open new stores, you know, how do you see the pace of that playing out over the rest of the year? You know, particularly as we move into the fall, where, you know, hopefully, we'll see a bit of a loosening of labor market and you know, could help to drive an acceleration in growth, you know, here in the US on labor front?
Yeah, absolutely. I mean, we - we would hire as many people as we find right now. The market - the tight labor markets are absolutely a part of the constriction of our ability to deliver the, you know, the kind of customer service that we're hoping to deliver, you know, we have high operational standards and I think our operation has done a great job throughout the pandemic, and through these tight labor markets. But I think if the labor markets open up, it will afford, you know, all of these delivery companies the ability to deliver by the better customer service and therefore, be able to increase the throughput and contribute to our growth ongoing.
Great, thank you so much.
Thank you, Alton.
Thank you. Our next question comes from the line of Dennis Geiger from UBS. Your line is now open.
Great, thank you. Rob, I wanted to ask first about the market share gains that you've seen. And if you have any sense on kind of where that's been coming from for the last many quarters. You know, is it coming from sort of the larger brand? Is it coming from the independent pizza chain or they're just continuing to be more pizza category occasions? Do you have a sense for you know, and curious how you see that opportunity going forward? I'm sure you'll take share wherever you can get it. But just if there's any thoughts from you on that front?
Yeah, I think, you know, I think our business growth is coming from a lot of different places, not even just in the pizza industry. I mean, excuse me, as you know, as we've looked at the business [technical difficulty] coming, hopefully, out of the pandemic, a lot of our, you know, businesses has been driven by a shift from going, you know, obviously dine-in to delivery and e-commerce and last-mile delivery are going to be continued to be consumer behaviors and dynamics that we think benefit us at an ongoing basis.
So within the pizza market and with industry, you know, we - we've seen that we've taken share from almost everybody, as you know, our comp sales have grown faster than our competitors. Obviously, we're driving dollar share. And then, but I think the predominant has come from the mom and pops more so than the national chain. But I think we've been able to grow faster than most people in the marketplace.
Got it. And then maybe just one more as it relates to anything else you can share on sort of the exciting new customer acquisition and retention that you highlighted. You know anything additional on those new customers on that you've acquired relative to their purchase behaviors, you know, I think you'd call that Epic Stuffed Crust. But beyond that, any other initiatives or opportunities that are kind of most critical to retaining and kind of continuing to attract those new customers? Thanks.
Yeah, I mean, we have a robust innovation pipeline that we're going to continue to launch. You know, it's been really exciting to see how this innovation pipeline has rolled out. You know, we - it's not, you know, the model that we necessarily employed at Arby's or Taco Bell, my previous life where we were pumping things out every month. I mean, this is more of a foundational innovation, you know, platform that we continue to launch between Stuffed Crust to Papadias, I mean, these aren't going anywhere.
So they brought in a lot of customers that have a higher ticket, because a lot of this is additive, right. This used to be a traditional pizza transaction now is a, you know, adding $3 more for a stuffed crust adding $6 more for a Papadias. So our ticket growth has gone up dramatically without us having to take really any pricing on our core items or increasing our delivery fee. So that's really incremental to our business. And that's how we're thinking about the innovation pipeline moving forward. And we've got a lot of stuff that is ready to roll out here in the back half of 2021 and into 2022.
Great. And congrats on the quarter.
Thank you.
Thank you. Our next question comes from the line of Brian Mullan from Deutsche Bank. Your line is now open.
Hey, thank you. Rob, just a follow-up to some of your comments to prior question. In comparison to say about 6,500 Domino's units today and about 6,500 Pizza Hut units today in North America. Is there a reason Papa John's couldn't get to that level one day? I mean perhaps their leads are too big or they're too penetrated? Or - and you're shut out there? I don't know. Just wondering how you think about that long-term domestic potential? Is there a ceiling we should be thinking about just in terms of -
Well -
Regard? Yeah.
You know, Brian, I think you nailed it. I mean, that's how I talk about it with our franchisees. That's how I talk about it within our company. And the fact that you know, Domino's and Pizza Hut have almost to 2x number of units, and we do domestically, there's no reason why we can't get there as well. We, you know, I think that with this brand haven't had a very strategic concerted development strategy in the past.
You know, we have a lot of one B2C franchisees who came in and, you know, they could find a sponsor they liked that it wasn't around another Papa John's, you know, you could open up Papa John's. And we had a lot of situations where restaurants were closing and, you know, people weren't set up for success. While we've spent the last 18 months doing it building a development capability that will be set up for success, both from the kind of franchisees that we're looking for that are experienced and well capitalized and also the tools that we afford them in the forms of final grade real estate and construction capability.
So we are very bullish on domestic development and our franchisees are really starting to, you know, engage and we're starting, you know, development agreements right now, we just signed a development agreement with our largest privately-owned franchisee this year is the first development agreement he's done in quite some time and he's very excited about it, we've got more lined up. So, I would expect that our development pipeline accelerate pretty dramatically here over the next 12 to 18 months.
That's great. And then just to follow-up. Can you talk about the business in China, maybe you remind us how this is doing? Do you have the right unit format that has a relationship with the partners, and I think you've spoken to an ability to add 1,000 units there over time, is that a medium-term goal? Because I was thinking it could be even more than that over the long-term. So just wondering if you could update us on that market?
Yes. I mean, China has a huge opportunity, as you know, our competitors have very developed with us who's there. And we have, you know, we have about 200 units there. The problem is, it's similar to kind of the dynamic I just shared with you, we continue to open units, but a lot of them closed.
So we're working with our Chinese partners to really build a model that's going to be able to sustain growth ongoing and keep, you know, not just opening new restaurant, but keep them open and help those franchisees be successful on an ongoing basis. So there's no reason why we can't get to 1.000 units in terms of the time horizon on that, you know, depends on what you call with mid tariffs, mid-term or long-term. But, you know, we think that that's for really achievable.
Thank you.
Thank you. Our next question comes from the line of Brett Levy from MKM Partners. Your line is now open.
Great. Thanks for the call. Thanks for taking my question. Just a first a couple of clarifications. Did you say low-mid single-digit? Does that mean the bottom half of the 4 to 6, it's not low single-digit and mid single-digit? And then also, you've talked about the improving profitability and the unit economics. Care to share anything in terms of either absolute restaurant level EBITDA for your franchisees or just magnitude of increases that you're seeing there? And then just finally on the labor front. You obviously had a successful year, you guys were among the earlier to go out and hire, and you've continued to supplement that. What are you seeing in terms of your retention, your turnover? How much of this hiring is proactive to get help - support the growth that you have? And how much of it is a need to just keep everything afloat? Thanks.
So on your first question regarding the low to mid, I think that you're thinking about it the right way. That's about how we're thinking about it. You know, the definition of low, the definition of mid, the definition of high [technical difficulty] can be more. So I think you're thinking about it the right way.
In terms of EBITDA percentage at the unit level, we're not - we don't disclose that information for company or franchise restaurants. So we're not going to be able to give you an exact EBITDA percentage margin rate. But on the labor side, you know, I think it's both. I think that we're definitely challenged, you know, it's a - you know QSR is a - you know, a minimum wage business and anytime you're competing for entry level workers and minimum wage workers, you're going to have a lot of turnover.
You know, we tried to do things that will help us to retain those workers. We've - we offer now Telehealth to everyone [technical difficulty] system, we have free college benefit. So our goal is really to be the employer of choice in this marketplace and be able to increase retention across our hourly workforce.
In terms of our, you know, salaried workforce, that our general managers that are above restaurant level management, we've had, you know, strong retention. We haven't seen, you know, a significantly higher amount of turnover despite the labor challenges. And you know, I think part of that is the success of the restaurant, when you know, the restaurants are making or driving sales, high sales. Our managers are making you know good salaries and bonuses. And so we tried to do everything we can to increase retention. And we've been pretty happy despite the challenges that you know, everyone who faced across the labor market as industry.
[Operator Instructions] Our next question comes from the line of Chris O'Cull from Stifel. Your line is now open.
Great. Good morning, guys. This is Patrick on for Chris. I just wanted to touch a little bit on what you're seeing in terms of dayparts or occasions with the outsized comp strength that you've seen. And, you know, particularly if there's an outsized portion of that coming from any particular time of day I know the Papadia platform additionally been an add-on has boosted the lunch business that you mentioned in the past. But also, you know, with the return to sports and just general return of consumer mobility, I'm wondering if you're seeing large party ordering, coming back to maybe pre-COVID frequency levels or something approaching that? Thanks.
Thanks, Patrick. Yeah, we haven't seen a significant shift to the daypart, you know, the launch of Papadias was intended to go and compete for that lunch daypart with sandwiches and we started seeing some movement there and subtraction there prior to the pandemic. And then obviously, people started working from home and that whole dynamic shifted. But really, what we've seen is, just outpaced share growth [technical difficulty] you know, early dinner and later dinner daypart.
Now, in terms of the large size orders, you know, we had hit a lot of that, you know, happens in the sports, and then we're looking at the Q3 thinking that's going to be a return to that. We haven't seen quite a return that yet with the football seasons coming up. And then, I think back-to-school this year, hopefully, you know, a lot of our operators service a lot of schools and kids head back to school this year, we also see a pickup in an average price per order that we you know, hope a bit more of a return to where we were before.
Thank you. Our next question comes from the line of Andrew Strelzik from BMO. Your line is now open.
Great, thanks. Good morning. I was just hoping you give some color on what you're seeing internationally in terms of consumer behavior and the drivers of the strong growth there. The operating environment seems like it's been pretty volatile with restrictions and the changes there. So we just love to get your perspective on what you're seeing in your key markets internationally? Thanks.
Yeah, we've seen. It's almost all of our markets are open back up. You know, the markets that we operate in have actually stayed open through the Delta variant, UK is our largest international market. And UK has been our strongest international market. But you know parts of South America has been a bit fluid. Chile has been a great market for us over the last year, but Peru has been up and down with its closures and restrictions.
The Middle East obviously has had some variability as they've closed and put in curfew. But overall, really seeing strong performance globally and the big challenge we've seen has been, I think, in Russia with some of the uncertainty there and how they handle the pandemic. But across the globe, we've - we're back operating and performing at a high level.
Thank you. Our next question comes from the line of Brian Bittner from Oppenheimer & Company. Your line is now open.
Thanks. Good morning. Just a big picture question, then I do have a quick follow-up on the guidance. Bigger picture, these company-owned AUVs are about 25%, 30% higher than your franchise system AUVs in North America. Can you just walk through what the main drivers of this difference is between the two businesses? You know, are the company-owned stores just in better markets? Or do you believe they actually represent some type of upside where the franchise AUVs could go as you potentially close that gap?
Yeah I think it's a little bit of both. I mean, obviously, as the company has sold off markets, the markets that were sold off were probably on the low performing markets and the market that were held on to were better performing markets. So you know, our company footprint is kind of in our kind of goes down where the brand started really in Midwest, down through the southeast. And so those markets really perform well for us, as opposed to the east and west coast.
Now, throughout the pandemic with some of our markets happen in those coastal states. You know, New York City was one of our fastest growing market as well as kind of the West Coast and we're starting to see - have discussion that actually see some development excitement taking place in those markets. So, I think it really is a function of kind of [technical difficulty] the penetration of the company markets relative to the franchisee markets. Now, as those - as we build more restaurants into those markets going to generate more marketing dollars. I think you'll be able - we'll see more of a balance between company and franchise AUVs.
Great. And the follow-up on the gains is on the back half same-store sales guidance. Still very impressive, you know, low-mid single-digits, given what you achieved last year. It does suggest a softening in the two year trend that you've been executing in the first half that you've been referencing in the first half. So, is there something you're specifically seeing in the business or the industry that would drive that change and kind of the two year trends in the business? Or is there some dose of conservatism built into the outlook just because of how strong your first half was in the menu innovation than the first half was?
Yeah. I would say, you know, really, it's driven by, we have a stronger back half of 2019 and a forecast of 2019. So, you know, our comps last year in the back half, particularly in Q4, you know, we're lower than our comps in Q2 and Q3, because we're having better number.
So if you recall, back to the first half of 2019, you know, the brand was really struggling. Q1 '19 minus 7%, Q2 '19 minus 6%. So as we comp those in Q1 in 2020, we kind of had, you know, yeah just to call what it is easier comps, we get into some tougher comps now in the back half.
But we're very excited about the, you know the continued sales momentum, I mean, our PSA in the back half are relatively consistent in the front half. So except in Q3 where we have some seasonal decline every year Q3 is obviously our lowest sales quarter.
But, I wouldn't say that we're making a conservatism I say, we'll see, you know, a bit of a sequential slowdown in two-year comps. I mean, I don't think that you should be planning for 33% to your comps on to-date. So, we will see two-year comps slowed down. But we're still you know our goal is always to outperform the industry at large and we think that we can continue to do that.
Thank you.
Thanks, Brian.
Thank you. Our next question comes from the line of James Rutherford from Stephens, Inc. Your line is now open.
Great. Thanks for getting me in. I wanted to ask Rob on the company store opportunity. You previously guided to opening 20 to 30 net new company locations this year if I got that correct. Clearly, you're sitting on a lot of company stores with AUVs as we just talked about quite a bit higher than the average franchise location. What are your thoughts toward refranchising a portion of those to incentivize some of these big operators out there to get into the system and kind of put a stake in the ground with big development agreements? Thank you.
Yeah, great question. We've talked a lot about that over the last couple of years. And I think our answers is pretty consistent. I mean, when we see opportunities to do that, and kind of embed a budget, a new franchisee or even a current franchisee wants to develop a market at scale, we're absolutely willing to look at divestiture of some of our portfolio.
So we've maintained optionality for you know, throughout the last two years in regards to filling in markets, building restaurants, but also selling restaurants if the opportunity presents itself. But we're absolutely not selling restaurants just to sell them. There has to - they have to be, that transaction got to come along with a big development agreement, and we're in some of those discussions right now.
Great, thank you.
Thank you. Our next question comes from the line of Todd Brooks from CL King & Associates. Your line is now open.
Hey, good morning, everybody. Just a quick question. If you're looking at the back half outlook, can you talk, I guess your inflation outlook as far as maybe key commodity classes or labor where you're expecting to see inflationary pressures maybe accelerate? And Rob you touched on pricing that the company's achieved kind of ticket gains with new product introductions, but that you thought that the brand has real pricing power. Can we just talk about thoughts on what you would need to see to maybe pull the pricing lever here in the back half as well across maybe some of the broader product portfolio? Thanks.
Sure, I'll let Ann speak the kind of our perspective on inflation and then I can give you some color on our thoughts on pricing.
Yeah. So we are, as it relates to specifics on the back half, we continue to expect some margin pressure on the food basket, there will be, you know, favorability in cheese, because it was very high last year. However, that'll be more than offset by inflation that we're seeing in other categories like soybean oil, meat, cardboard in the boxes. So in total, you know, we are expecting to see some [technical difficulty] on the food costs in the back half of the year.
Similar story with labor. You know, just as we've been talking about the tightening market and competing for talent, but I think the thing I would highlight is, while we will see some pressure and our margins come down from the first half, we still expect year-over-year to continue to improve margins.
So if we do see significant inflation, and we need to pull the trigger on pricing, we feel confident that we'll be able to do that. We've held off on that. I mean, when we kind of kicked off this thing two years ago, one of the biggest challenges we had is that our value perception relative to our competitors was way off. And so, over the last two years, we have been, you know, very focused on driving growth through innovation versus driving, you know, ticket growth through pricing. So we've taken almost no pricing.
And I think that that has helped to reset our value perception relative to our competitive set, and balance that a little bit. So as we move forward, if we can continue to deliver innovation that consumers self-selected, and that mitigates the impact of inflation, we'll continue to do that. But we're also testing multiple different scenarios where, you know, we could potentially take pricing on some of our items through some delivery fees or other ways that to mitigate the cost of the increased costs. So, we'll be prepared either way.
Great. Thanks, Rob.
Thank you.
Thank you. At this time, I'm showing no further questions. I would like to turn the call back over to Rob Lynch for any closing remarks.
Well, thanks, everybody for joining us today and for your great questions this morning. You know, we really hope that you are as excited about the future of Papa John's as we are, obviously the comp sales growth has been an ongoing story. But I think that, you know, the really big news here today is the development growth, the development and franchise - franchisees' willingness to invest capital into a system is one of the biggest indications of the health of that system. And we've been promising it for quite some time and we feel like we are on the, you know, on the cusp of delivering some really outpaced development growth. So, we're really excited. We hope you're excited as we are. I hope and wish that all of you stay safe and wish you all well. And look forward to talking to you again soon. Thank you very much.
This concludes today's conference call. Thank you for participating. You may now disconnect.