Papa Johns 2008 Annual Report Download - page 66

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59
existed. The consolidation of BIBP had a significant impact on our operating results in 2008, 2007 and
2006 and is expected to have a significant impact on future operating results depending on the prevailing
spot block market price of cheese as compared to the price charged to domestic restaurants.
Many domestic franchisees are facing financial challenges due to a recent decline in sales and continued
operating margin pressures from higher commodity costs (primarily cheese and wheat) as well as
increased utility costs. In addition, due to the recent events impacting credit availability, many
franchisees are having difficulty obtaining credit from third-party lending institutions for working capital
and development purposes. In an effort to assist franchisees through this difficult period, the BIBP
formula was modified effective for the last two months of 2008 and for 2009. The modified formula for
the last two months of 2008 resulted in domestic restaurants paying the expected futures spot market
price for cheese plus an interest carry cost (Q4-08 modified price), which was approximately $0.28 per
pound less than the pre-established fourth quarter price paid by domestic restaurants during October
2008. The modified price reduced the food cost and increased operating margin for the average restaurant
approximately 1.4% for the last two months of 2008.
With respect to the BIBP cheese cost relief for 2009, for the first two months of the year the price per
pound was set at a level approximately equal to the Q4-08 modified price, and substantially less than the
price as would have been determined by the standard formula. Effective in March 2009, we will modify
the BIBP formula to establish the price of cheese on a more frequent basis at the projected spot market
price plus a certain mark-up. The amount of the mark-up depends on the projected spot market prices.
Under this new price formula, we anticipate BIBP will substantially repay its cumulative deficit by the
end of 2011.
The following table presents the actual average block price for cheese and the BIBP block price by
quarter in 2008, 2007 and 2006:
2008 2007 2006 2008 2007 2006
Quarter 1 1.904$ 1.341$ 1.268$ 1.608$ 1.344$ 1.548$
Quarter 2 1.996 1.684 1.182 1.754 1.379 1.482
Quarter 3 1.859 1.969 1.215 2.042 1.497 1.525
Quarter 4 1.748 1.982 1.306 1.831 1.564 1.447
Full Year 1.877$ 1.744$ 1.243$ 1.809$ 1.446$ 1.501$
BIBP Block PriceActual Block Price