Popeyes Louisiana Kitchen's (PLKI) CEO Cheryl Bachelder on Q1 2016 Results - Earnings Call Transcript

| About: Restaurant Brands (QSR)
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Popeyes Louisiana Kitchen, Inc. (NASDAQ:PLKI) Q1 2016 Earnings Conference Call May 26, 2016 9:00 AM ET

Executives

Chris Phillips - VP Finance Strategies

Cheryl Bachelder - Chief Executive Officer

Will Matt - Chief Financial Officer

Analysts

Michael Gallo - C.L. King

Joshua Long - Piper Jaffray

Andrew Charles - Cowen and Company

Alton Stump - Longbow Research

Jake Bartlett - SunTrust Robinson Humphrey

Nick Setyan - Wedbush Securities

Steve Anderson - Maxim Group

Operator

Good day, ladies and gentlemen and welcome to the Popeyes Louisiana Kitchen First Quarter 2016 Earnings Conference Call. As a reminder, this conference call is being recorded.

I’d now introduce your host for today’s conference, Mr. Chris Phillips, VP Finance Strategies. Sir, please go ahead.

Chris Phillips

Good morning and thank you for joining the Popeyes’ First Quarter 2016 Earnings Call. Before we begin, I would like to read the following forward-looking statements. Certain statements made on this call by Popeyes Louisiana Kitchen, officers and employees regarding future events and developments and our future performance, as well as management's expectations, beliefs or projections related to the future are forward-looking statements within the meaning of the federal securities laws. We wish to caution investors to not place undue reliance on any forward-looking statements since those statements speak only to the date they are made. By their nature, forward-looking statements are subject to a number of risks and uncertainties that could cause actual results to materially differ from those anticipated in the statements. These risks and uncertainties have been described in the Company's Annual Report on Form 10-K, quarterly reports on Form 10-Q and other filings with the Securities and Exchange Commission. We refer you to those sources for more information.

During this call, references may be made to the following non-GAAP terms, adjusted earnings per diluted share, operating EBITDA, company-operated restaurant operating profit, free cash flow, and consolidated total leverage ratio. The Company defines these terms as follows; adjusted earnings per diluted share as reported net income after adjusting for certain non-operating items consisting of other expenses/income net, deferred tax liability adjustment and the tax effect of these adjustments.

Operating EBITDA, as earnings before interest expense, taxes, depreciation and amortization and other expenses income net. Company-operated restaurant operating profit as sales by company-operated restaurants minus restaurant food, beverages and packaging, minus restaurant employee occupancy and other expenses, free cash flow as net income plus depreciation and amortization, plus stock-based compensation, minus maintenance capital expenditures.

Consolidated total leverage ratio as the ratio of consolidated total indebtedness divided by consolidated EBITDA. Consolidated total indebtedness is generally defined as total indebtedness reflected on our balance sheet plus outstanding letters of credit. Consolidated EBITDA is defined as earnings before interest expense, taxes, depreciation and amortization, other expenses income net and stock-based compensation expense for the four immediately preceding fiscal quarters.

The Company's full definitions, computations and reconciliation to GAAP measures of the numbers referenced for these terms are contained in our Annual Report on Form 10-K quarterly reports on Form 10-Q and in our earnings release that can be found on the Company's website at www.popeyes.com/investors.

I will now turn the call over to Cheryl Bachelder, our CEO. Cheryl?

Cheryl Bachelder

Thank you, Chris. Good morning. We are pleased to report another quarter of solid results at Popeyes. Our first quarter performance was inline with our expectation and we are on track to deliver our 2016 full year guidance. We are confident that our investments and our new strategic roadmap are preparing us to reach the bold growth goals that we announced on last call.

The first quarter results including positive global same-store sales, significant market share gains and domestic chicken-QSR, strong new unit openings worldwide and earnings inline with our expectations. Specifically, global same-store sales were up 1.6%, domestic same-store sales were up 1.1%, which was our 21st consecutive quarter of positive domestic same-store sales. This is rolling over a 7.1% increase in the first quarter of 2015.

Our domestic chicken-QSR market share grew to a new record high of 26.3%, that is up 1.7 percentage points from the first quarter of 2015. Our International same-store sales increased 6.2% rolling over an increase of 6.1% in the first quarter of 2015. International same-store sales have now been positive for 27 consecutive quarters.

We’ve experienced strong growth in same-store sales in markets such as Turkey, Latin America and the Middle East where we partnered with our franchisees to launch brand building television advertising campaigns.

On the unit growth side, the Popeyes system opened 44 new restaurants including 25 international openings. At the end of the first quarter, the Popeyes system had 2569 restaurants around the globe, compared to 2420 in the first quarter of last year. We delivered $0.58 of earnings per diluted share and $0.58 adjusted earnings per diluted share, which was inline with our annual plan.

And finally, we generated free cash flow of $16.8 million during the quarter and we repurchased approximately 554,000 shares of our stock for approximately $30 million, which was at the high end of our stated range.

Now to discuss the progress we’ve made against our strategic roadmap during the quarter. As a reminder, our new strategic roadmap frames up our long-term growth goal and establishes the key strategies to achieve those goals. The roadmap is our path to superior performance for our franchise owners and our shareholders.

The new roadmap has three strategic pillars, Louisiana heritage, the source of our relevant distinctive brand. Passionate team, which is our conviction that people drive restaurant profitability and routine excellence, our commitment to consistent operational excellence in our restaurants. As we just discussed previously, these new pillars will be enabled by our one technology initiative.

Now to update you on our progress on each of those pillars during the quarter. Our Louisiana heritage is the inspirational platform for all of our brand innovation and marketing. Throughout the year we feature our food quality our flavorful traditional spicy foods and Louisiana culinary roux.

In the first quarter, we had a full calendar of exciting news for our guests and the promotions performed well. Our new Spice Packed Wings, Butterfly Shrimp Taco Box, and Cajun Surf & Turf for our Seafood Mardi Gras celebration. Our core menu performance softened early in the quarter as our customers were enticed by the discounts from burger chains.

Our experienced teams quickly assessed the situation. We were agile in our response. In April, we featured a compelling core menu offer, the $5 bonafide big box and saw excellent response from our guests. This action resulted in two back-to-back domestic record weeks in April and strong chicken-QSR share gains. The quarter started slow and ended strong for Popeyes.

As we’ve seen many times before, a strategic combination of superior food quality, exciting new product innovation, and selective promotion to core menu is the right approach for Popeyes to steadily grow top-line sales.

Moving now to passionate team, our second strategic pillar. This pillar conveys our conviction that engaged teams deliver a superior guest experience that yields more loyal guests that spend more money which drives sales and profits for our owners. In short, people drive profit.

After two years in development, we have now launched the training tool to help restaurant leaders advance the engagement of our teams and our guests and handle our peak hour volumes. Our franchisees attended a full day of workshops at our March Global Convention to prepare for the in-restaurant implementation of these tools over the next few months.

Specifically, we are launching a new measure of employee engagement, the Voice of the Team Engine. This first time survey will serve as a benchmark from which our managers can action plan for continuous improvement.

Similarly, we continue to measure and action plan, improved guest engagement through the voice of the guest survey. As you may recall, last year we rolled our service basics 1.0 training and improved our voice of the guest scores in the first quarter of 2016 by 5 percentage points over a year ago.

This year, we launched a new guest recovery program, we call service basics 2.0. This training features our restaurant teams to resolve a guest complaint quickly, which is essential to retaining guest loyalty. We are now implementing the in-market programs and measures, which will drive a better employee and guest experience and our long-term goal is that one day our employee and guest experience will be as same as our Louisiana Food.

Our third pillar is routine excellence. Guests expect a restaurant chain to provide a reliable, consistent experience and at Popeyes, we want that to mean excellence every time you visit. First, we launched a new domestic restaurant evaluation protocol partnered with more frequent restaurant visits to coach our teams to consistency and continuous improvements.

Second, we have restructured our field organization to double the number of visits to each domestic restaurant. Third, we launched our new balance score cards, every four week period we now post each restaurant results on six key metrics with comparisons to the region and entire nation to inspire competition and continuous improvement.

This new protocol of updated operating standards, more frequent restaurant coaching visits, measured by balance score cards is the formula to create routine excellence in our restaurants.

I am happy to report that 98% of our franchisees have been certified in these updated operating protocol and over the next few months, we will certify all 2000 plus domestic restaurant general managers. We have now begun the action plan to drive meaningful operations improvement.

Finally, these three strategic pillars will be enabled by a significant technology initiative that we call one technology. We have an incredible opportunity to develop a unified technology platform that will transform how we operate our restaurants, communicate with our team members and interact with our guests.

Our first step is to fully scope and plan this initiative with the help of a strong IT consulting firm. This work has begun in earnest and will be completed in a few months. The process will assess our current state, establish our ambitious in-state and then determine priorities and pacing for the development, testing and rollout of new processes and new technology. We will provide a full update on this project at the Fall Analyst Day event.

Behind everything we do at Popeyes are the purpose and principles that guide us in decision-making with our franchisees. We remain intently focused on serving our franchise owners well as the path to growth and profitability. Our partnership has been a competitive advantage in recent years and will serve the company well as we aim for these bold new goals.

As I mentioned on our last call, over the next seven years, we plan to drive our domestic restaurant average unit volume from approximately $1.4 million to $2 million. We expect this sales increase will drive average domestic franchisee profitability from approximately $333,000 to over $500,000 per restaurant representing margins of about 25%.

With strong unit economics, we will continue to expand the Popeyes brand globally increasing our restaurant count from approximately 2500 to 4000 restaurants. With these goals in mind, and the strategic roadmap we’ve shared with you, we are confident in Popeyes’ ability to outperform our competitive set for years to come. The outlook for this brand is strong.

I would like to now turn the call over to Will Matt to discuss the financial highlights in our first quarter. Will?

Will Matt

Thank you, Cheryl. Total revenue in the first quarter increased 3.4% to $82.2 million, compared to $79.5 million in the prior year. Of these revenues, franchise revenues were $45.7 million, up $2.6 million over the prior year. This 6% increase is primarily due to positive same-store sales performance and net unit growth. In the first quarter, our system-wide sales increased 6.4% driven by net unit growth and positive same-store sales.

Revenue from company operations was largely flat at $34.6 million with same-store sales down $2.4 million. While same-store sales in our heritage markets were up a strong 3.2%, new markets continue to reflect negative sales transfer as we build out these markets.

Company-operated restaurant operating profit was $7 million or 20.2% of sales, compared to $7.5 million or 21.6% of sales in the first quarter of 2015. The decrease was mostly due to lower sales in operating profit in our new markets.

Our first quarter overall G&A expense was $28.7 million compared to $25.3 million last year. The $3.4 million increase was primarily attributed to timing and our planned full year investments of $32 million for our strategic roadmap initiatives.

The 2016 G&A spending will be managed within our annual guidance of the 2.9% to 3% of system-wide sales. As expected, during the quarter, we saw year-over-year decreases in net income, operating EBITDA and free cash flow. These decreases reflect our front-end loaded general and administrative investments to support our new strategic roadmap initiatives.

Reported net income was $12.9 million or $0.58 earnings per diluted share compared to $13.6 million or $0.58 per diluted share in the first quarter of 2015. Adjusted earnings per diluted share were $0.58 in both the first quarter of 2016 and 2015.

Operating EBITDA was $25 million or 30.4% of total revenues, compared to $26.1 million or 32.8% of total revenues in the first quarter of 2015. During the first quarter, we generated free cash flow of $16.8 million compared to $17.7 million in the first quarter of 2015.

At approximately 20.4% of total revenue, the company’s free cash flow generation serves the fuel to strategic investments and share repurchases. We invested $3.4 million in various capital projects through the end of the first quarter predominantly for construction of new company restaurants.

As mentioned earlier, during the first quarter, we repurchased approximately 554,000 shares of common stock for approximately $30 million. After the end of the first quarter, the company repurchased approximately 81,000 shares of its common stock for approximately $4.4 million.

Our consolidated total leverage ratio is now at 1.5 times consolidated EBITDA as defined in our credit facility, compared to 1.2 times at the end of the fourth quarter of 2015. As a reminder, in 2015, our Board of Directors approved a new authorization to repurchase $200 million of shares.

We intend to adjust our capital structure and to increase our total leverage ratio to a range of 2.5 times to 3.5 times by the end of 2017. To this end, in January, we secured a new credit facility with a $250 million committed revolver and $150 million expansion feature enabling us to fund organic growth and repurchase shares returning value to our shareholders.

We are also pleased to report our franchisees continue to enjoy profit expansion at the store level driving their commitment to Popeyes and future new unit growth. In 2015, our domestic freestanding franchise restaurants reported a full year average restaurant operating profit before rent of approximately $333,000 or 22.9% of sales representing a $25,000 increase over last year or 0.5 percentage points.

This marks the eighth consecutive year of increased profit dollars. As a reminder, we report these numbers one quarter in arrear.

Now to move on to our 2016 guidance. First quarter results were as we expected and we remained on track to deliver our 2016 full year guidance. Earnings per diluted share and adjusted earnings per diluted share to be in the range of $2.10 to $2.15. We also continue to expect global same-store sales growth in the range of 2% to 3%.

As we said previously, the second half of this year will be stronger due to our confidence in our marketing calendar that includes innovative new products and selective discounting for our guests. We are also lapping lower comparisons in the second half of the year.

We expect global new restaurant openings in the range of 200 to 235 including approximately 85 to 100 internationally and three to five new company-operated restaurants. Net new restaurants to be in the range of 140 to 185 for a net unit growth rate of approximately 6% to 7%.

General and administrative expenses to be approximately 2.9% to 3% of system-wide sales, maintaining an investment rate that supports long-term growth. Now, G&A spending will be higher in the first half than in the second half as it is front-end loaded to fund our investments and our strategic roadmap initiative.

Capital expenditures to be in the range of $10 million to $15 million, including approximately $10 million for company-operated restaurant developments.

Share repurchases of 80 million to 120 million in outstanding shares compared to 62 million in 2015 with approximately 60 million repurchased from operating cash flows and up to 60 million from additional borrowings. The effective income tax rate in 2016 to be approximately 38%.

I would now like to turn the call back over to Cheryl for closing remarks. Cheryl?

Cheryl Bachelder

Thank you, Will. On the last call, we reported that Dick Lynch and I had signed new employment agreement. I would like to direct your attention to the four additional new executive employment agreements that we reported last night in our 10-Q. I am truly delighted with this talented team’s commitment to realizing Popeyes’ bright future. So as we wrap up today’s call, I convey to you our confidence in Popeyes. We are a healthy growing company with substantial upside ahead and top-line sales restaurant profits and net new unit growth.

Our Q1 performance ended strong and we are affirming our full year guidance for 2016. This experienced and committed leadership team will continue to steward our new strategic roadmap that will deliver steady and strong future results.

I will now turn the call over to the operator to open up the line for your questions. Thank you.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Michael Gallo of C.L. King. Your line is open.

Michael Gallo

Hi, good morning.

Cheryl Bachelder

Good morning, Mike.

Will Matt

Good morning.

Michael Gallo

My question is on the investments. I think if I look over the last seven or so years, you made a lot of investments which I really applaud you talking, I think it’s driven the consistency and performance, but I guess as we are going through this year, little slowness in the industry, lot of discounting and obviously your sales trajectory in Q1 was below where you expect it to be for the year.

So I was wondering if same-store sales don’t accelerate, whether you think about pivoting some of those investments back or that you will continue to move along at the same rate and how should we think about your confidence in being able to hit that guidance that you have, even if you end up with a somewhat lower same-store sales number given the heavy investments you are making this year? Thanks.

Cheryl Bachelder

Thank you, Mike. First of all, we are very much aligned with how you opened that comment which is, we are making investments for the long-term health of this company. It happened that we are making those investments during a quarter of high competitive activity and value promotion.

But that doesn’t changes saying about our confidence in these investments. We told you last call, that these are investments in visiting our restaurants more often holding them to high standards, helping them continuously improve to provide a better experience to our guests and we know that’s what really drives comps in our business long-term.

So we are very confident that we’ve done the right thing in our investments. They are front-end loaded, primarily because of the technology project where we funded the scoping with an outside partner this quarter and that’s exactly on track in terms of what we expected to accomplish this quarter.

And so, the second part of your question, on the outlook on the year, it is why we reaffirmed the guidance sales 2% to 3% and our earnings at $2.10 to $2.15. We anticipated this year to be competitive, particularly in the first half. We talked about that on the last call that our comps would be slower in the first half and more robust in the second half.

We’ve been agile and made changes to our promotional calendar and our new products plan to protect those comps performance goals and I think the most notable aspect of our performance domestically is that our market share advanced more than ever in the first quarter against other chicken competitors.

So, I believe that our team has responded in a way that will deliver on those comp sales that we put in our guidance for the full year. Mike, as you said, we have proven over time that we stick to our guns of how we are going to manage the long-term health of this company, even if there is some competitive value activity in the quarter and I think that’s what this quarter represents and I think you can feel good about our affirmation of the full year.

Michael Gallo

Thank you, very much.

Operator

Thank you. Our next question comes from Joshua Long of Piper Jaffray. Your line is open.

Joshua Long

Great, thank you. I wanted to see if you might be able to circle back to food cost and the outlook on that side of the P&L. It seems like we are entering at least a favorable environment for some pieces of the P&L, but just curious on how you are looking at contracting for the year and kind of how your franchisees are then – how that’s flowing through to your franchisees at the store level profitability which I know is a focus for you all?

Cheryl Bachelder

So, it’s a good year for food cost and stability. Last year we saw some increases in chicken, but this year, we’ve seen stability and expected – provided good weather through the corn season. We expect stability slight improvement as we go through the year on our food basket.

So, it’s a good year for commodities which is certainly something that helps our restaurant P&L. We’ve only reported restaurant P&L through the fourth quarter, but the results were outstanding and we continue to move on our goal of steadily driving this system towards that long-term goal of a $2 million restaurant making 25% in the fourth quarter was right on track.

Will Matt

We are expecting chicken prices to remain modestly down in 2016 as well as the other chicken baskets. And again, our franchisees enjoyed very nice profitability in 2015 at 22.9% ROP before rent and that was up 0.5 percentage points over last year.

Joshua Long

Appreciate the context. In terms of the G&A spend for the year, I understand that the first half of the year will be up more than the second half, but curious of the majority of those investments have already been made here in the first quarter or the implication is that 2Q has similar level of investments before it really levels off in the back half?

Cheryl Bachelder

They are first half loaded and approximately 75%, 80% of the investments occur in the first half.

Joshua Long

Okay, understood. Thank you.

Operator

Thank you. Our next question comes from Andrew Charles of Cowen and Company. Your line is open.

Andrew Charles

Great, thanks. How are you thinking about the competitive environment from the burger operators as we progress through 2016? Discounting, I think you expect, obviously, strong results in the back half of this year, but if discount activity persists in the second half, will this challenge your sales guidance? And then just separately, you mentioned selective discounting opportunities in the second half, are any of these in place so far?

Cheryl Bachelder

Yes, Andrew. The reason we feel confident in our sales guidance for the year is we’ve been in a discounting environment before. This is not new in our category. And what we’ve done is, we’ve agilely adjusted our calendar. We did it in the first quarter in April, adding the $5 bonafide big box which performed exceptionally well in providing value to our core menu customer.

And we will selectively do that throughout the balance of the year with value promotion that driving that customer to our core menu while this competitive environment continues. We do expect beef prices to remain low throughout the year just like chicken prices. So it’s going to be a competitive year and we’ve reflected that in our planning and in our guidance.

Will Matt

We think that combination of emphasis and the excellence of our food quality, the ongoing new product innovation that we have with the selective promotions is a great balance for steadily driving our sales improvements that we’ve enjoyed over the years.

Andrew Charles

Got it. And then Will, the $30 million pace of repurchase in the quarter implies you will hit the high end of the purchase guidance if you extrapolate it on a quarterly basis. You picked up the repurchase activities, you progressed through the quarter and just kind of wondering what will drive you decision to potentially slow down on the repurchase activity?

Will Matt

Yes, our guidance on share repurchases is, we will repurchase between $80 million and $20 million for the year.

Andrew Charles

Right. You obviously, you are earlier on pace that $30 million, is you extrapolate that over the next four quarters tip the high end of that. So, just kind of curious about the factors that played out caused you to maybe potentially slow down on share repurchases as you increasingly repurchased as the first quarter progressed?

Cheryl Bachelder

We’ve demonstrated that we buyback shares real consistently and steadily and we’ve affirmed our guidance for the year and that’s about all I can give you on that.

Andrew Charles

Fair enough. Thank you.

Operator

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

Alton Stump

Thanks, and good morning, Cheryl and Will. A quick question on the timing of your big box, you rolled it about one month earlier this year versus last year, clearly, obviously that what a good move had a good impact help drive better growth towards the end of your first quarter.

But, it also ended about three and a half weeks earlier this year versus last year, so in that, that could be any concern as you head that box deal in place for most of May last year versus ended at the 1st of May this year?

Cheryl Bachelder

Well, you keep detailed notes. Alton, all that’s accurate and as I mentioned, we don’t give our go forward promotional calendar, but what I am comfortable saying is that, we are going to pop selective discounts into our calendar to keep sales momentum on track.

Right now, for this week in our restaurants, there is a cool $5 favorites week going on that you can go try our current core value. And then, shortly after that, you’ll see an exciting new product. And so, you can expect us to balance between those exciting new products and selective core menu values, so that the momentum continues.

Alton Stump

Makes sense, and then, I guess, just, a follow-up on that, why not, because it looks like the $5 box does have a very nice benefit for you. Why not keep that in the store long, because it’s a profitability issue or is it just a timing standpoint that once again get to a one month deal, this year like you did last year?

Cheryl Bachelder

We believe that selective value is healthier than constant value, which depreciates the value in the menu prices. And so, we would rather punch it aggressively periodically than go to a constant state of discounted core menu item.

Will Matt

We want to be very careful that we don’t respond in the short-term and undermine the long-term brand authority that we have.

Alton Stump

Got it. And then one last one, and I hop back in the queue here. Just, I think about the back half of the year, the big question is, how promotional will the major hamburger guys stay or not stay, may color as to hit your guidance whether you need the major hamburger guys to pull back a little bit on the promotions or do you think you could still get there up to the 3% global comp number, even if we don’t see the hamburger guys pullback promotions?

Cheryl Bachelder

Our guidance assumes that we have continued competitive activity throughout the year.

Alton Stump

Got it. Okay, thanks a lot.

Cheryl Bachelder

Thank you, Alton.

Operator

Thank you. Our next question comes from Jake Bartlett of SunTrust. Your line is open.

Jake Bartlett

Hello. Thanks for taking the question. My question is on 2Q expectations. You talked about that the back half being stronger, we know 1Q is. It’s unclear to me whether you expect, it seems like you ended the run rate at the end of 1Q which was pretty strong and that you are going to continue to push some of the value with the $5 thing you just mentioned.

So, can you help us out on second quarter expectations that we are obviously little bit off on the first quarter given that you kind of hit your own expectations. But any help there would be good just because, you could actually have a decent second quarter, you still have the first half be weaker than the second half?

Cheryl Bachelder

Yes, and that’s very astutely said. The guidance we’ve given is that the comps in the first half are going to be slower than the comps in the second half. So the primary sales recovery is in the back half of the year and we don’t guide by quarters. So I can’t give you specifics on comps by quarter. But I think you can see in the rollovers that the trends changes in the rollover in the second half and we believe our calendar is teed up for strong innovation and value in the second half. So that combination means the trend pick up is in the second half.

Jake Bartlett

Okay. And then, could you help us at all in terms of maybe that kind of cadence on the international side. It flips around where you get much more difficult comparison in the back half on the international side. Andy help you can give us there in terms of the cadence of quarterly comps?

Cheryl Bachelder

In the international, obviously, we are seeing continued strong comps globally and at a pretty steady rate compared to prior year trend. About the only tweak so to speak, we see in international is over the summer, there is always a timing impact of Ramadan when the countries in our mix that celebrate that event, sometimes shift the sales from quarter-to-quarter.

And if you look at the Ramadan calendar this year, there is a slight change in the second, third quarter mix, but it’s very modest in terms of its impact on our comps. And so the full year trend is as we guided is consistent with current trend. There is just sometimes a slight tweak between that Ramadan timing.

Jake Bartlett

Got it. And then, on pricing, you talked about commodity costs being slightly favorable, but we all know that there is labor pressures out there. Can you give us as sense as to where the level of pricing that was in your first quarter comp? Or just your expectations for pricing that franchisees are probably, it seems like other concepts are pricing more towards labor, so I’d be curious?

Cheryl Bachelder

We did not have significant pricing activity in the first quarter as there were some selective increases I am sure among franchisees, but there was no broad moves in pricing in the first quarter.

But, on the labor point that you raise, it is true that the two levers are pricing and labor productivity and we are seeing that in our franchise operations that selective pricing and selective reduction in labor is occurring, particularly in those markets feeling the pressures of labor increases that are too fast. And so, you are seeing that industry-wide, we are seeing that at Popeyes.

Jake Bartlett

Great. And then, last question, sorry, sorry.

Will Matt

Well, it was – if you recall last year, we were more – we were providing more guidance with pricing for our franchisees given that we had a significant increase in our chicken pricing. But that is not then the case this year.

Jake Bartlett

Got it. Lastly, on regional performance. Any help you can give us on just how you perform in different markets maybe, just said more clearly, was there weakness in markets like Texas or strength in certain markets like California that we might expect?

Cheryl Bachelder

No, we had – our performance was pretty steady across the country. Over the last 12 months, we’ve definitely seen some slowing in the Texas, Louisiana oil corridor. That’s the only regional note that I’d make. Other than that, the balance of the country has been pretty steady.

Jake Bartlett

Great. Thank you very much.

Cheryl Bachelder

Thank you.

Operator

Thank you. Our next question comes from Nick Setyan of Wedbush Securities. Your line is open.

Nick Setyan

Thank you.

Cheryl Bachelder

Hello.

Nick Setyan

Hi. So, I guess, the biggest surprise to me was actually on the company-owned labor line. We have seen pretty impressive leverage in the back half of last year even with the negative comps that we saw in the company-owned side in the back half of the last year. So I guess, maybe you guys can give us some color on what happened in Q1 and whether do you leverage every time you want is going to continue for the rest of the year or there are something that you can do to mitigate some of that pressure?

Cheryl Bachelder

So, a couple of things, Nick. First I think we have to continue to say that there are two different stories here. One is the heritage market and one the new markets of Indianapolis and Charlotte. Our heritage markets as Will mentioned were up 3.2%. They outpace the domestic average comps of 1:1.

They performed well and the profitability in those markets are up and good. So, the challenges we are having is that Indianapolis and Charlotte did not meet their plan on top-line or on labor as you saw in the P&L and we’ve put people on the ground to address both of those opportunities in those markets.

Simply remind you these are 31 restaurants and yes, they are not performing at plan, but we understand our responsibility to get them back on track in the back half of this year. We have reflected their performance in our guidance. And so I think it’s important for you know while that was an area we were not happy with our performance, we’ve reflected that performance in our full year guidance.

Nick Setyan

Understood, and I think, I forget if it was last quarter I asked whether you do think that we’ll get unit leverage on an annual basis at the company-owned operating margin. Is that still the case? Do you still think that we can get leverage on an annual basis year-over-year in 2016 versus 2015?

Cheryl Bachelder

I can’t tell you that we will see leverage in the full company ops P&L. We are seeing that in New Orleans and Memphis drive that as the top-line grows they leverage labor. We don’t have that top-line strength in the other two markets and that’s why you see the labor bump, labor really is directly tied to the strength of the top-line. And so, that’s what we are managing, that’s what we are chasing is to get the top-line improved, so that we can properly service our guests and have labor inline with expectations.

Nick Setyan

Makes sense. And just, lastly, we did see the $5 big box help dramatically and then, you guys kind of took it out a little bit earlier than I thought you would, maybe a little bit different way to look at it is, did you guys feel confident enough in the sales trends at this point to take it off? Or is there something else that you guys are looking to introduce here that’s going to, I guess, pick up the – particularly since we are comping over to $5 big box versus last year in Q2?

Cheryl Bachelder

Right. So, you are really accurate. When you move a promotion, you move the lap versus year ago, okay. And so, what I can tell you in the current environment, we are right now in a $5 favorites week as we speak in restaurants and we have a new product launching immediately thereafter that we are confident that’s tested and proven. And so, we are going to continue to alternate between these exciting new products and smart discounting. And yes, week-to-week, the comps will vary, okay. But we are confident in our plan achieving the goals that we step for the year.

Nick Setyan

Perfect. Thank you.

Cheryl Bachelder

Thank you, Nick.

Operator

[Operator Instructions] Our next question comes from Steve Anderson of Maxim Group. Your line is open.

Q - Steve Anderson

Yes, thank you. Just want to piggy back on Nick’s question regarding the Indianapolis and the Charlotte markets. I just want to see are you still doing some new unit developments that you are looking at 3 to 5 for this year. Will those be in the Indianapolis and Charlotte markets? And given that you really wanted to focus on improving the top-line, do you think it might make sense to even pullback the development schedules further or at least until you can get that resolved?

Cheryl Bachelder

So, on new developments, we affirmed our guidance of 3 to 5, as you know that’s significantly lower than we had planned in prior years to be growing. So we have slowed the growth rate significantly while we address these matters. And yes, top-line is a very important part of getting those markets on track and so you can expect that that’s a big part of our focus.

Steve Anderson

Understood that. Okay, thank you.

Cheryl Bachelder

Thank you.

Operator

And I am not showing any further questions in the queue at this time. I’d like to turn the call back over to Cheryl Bachelder for any further remarks.

Cheryl Bachelder

Well, I want to thank you for participating in our call today. On June 15 we are going to be in New York presenting at the Piper Jaffray Consumer Conference and on June 22, we will be in Nantucket at the Jefferies Consumer Conference.

So, until then, I want you to get out and try that promotion that I mentioned, our $5 favorites. A one week special promotion, so you have to go now and next week I want you to come taste the fabulous new product that I mentioned is called Magnolia Blossom Chicken with a spicy orange dipping sauce and it’s offered with a choice of one of our signature size in a biscuit for $3.99.

You aren’t going to want to miss this one. So, we look forward to speaking with you again in mid-August and we hope you have a great day. Thank you very much.

Operator

Ladies and gentlemen, thank you for participating in today's conference. This concludes today’s program. You may all disconnect. Everyone have a wonderful day.

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