Domino's Pizza, Inc.'s (DPZ) CEO J. Patrick Doyle on Q1 2014 Earnings - Call Transcript

Domino's Pizza, Inc. (DPZ) Q1 2014 Earnings Call Corrected Transcript: 01-May-2014


Corporate Participants

Lynn M. Liddle - Executive VP-Communications & Investor Relations, Domino's Pizza, Inc.

Michael T. Lawton - Chief Financial Officer & Executive Vice President, Domino's Pizza, Inc.

J. Patrick Doyle - President, Chief Executive Officer & Director, Domino's Pizza, Inc.

Other Participants

Jeffrey A. Bernstein - Analyst, Barclays Capital, Inc.

Mark E. Smith - Analyst, Feltl & Co.

Alvin Caezar Concepcion - Analyst, Citigroup Global Markets Inc. (Broker)

Alton K. Stump - Analyst, Longbow Research LLC

Brian J. Bittner - Analyst, Oppenheimer & Co., Inc. (Broker)

John S. Glass - Analyst, Morgan Stanley & Co. LLC

John W. Ivankoe - Analyst, JPMorgan Securities LLC

Peter M. Saleh - Analyst, Telsey Advisory Group LLC


Operator: Good morning. My name is Vanita, and I will be your conference operator today. At this time, I would like to welcome everyone to the Q1 Financial Results Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] Thank you.

Ms. Liddle, you may begin your conference.

Lynn M. Liddle, Executive VP-Communications & Investor Relations

Thanks Vanita and thanks everybody for joining us this morning. We should be an hour or less, we will give an opportunity for some prepared remarks as well as Q&A. I would also ask that members of the press who are on the call realize this is for investors and stay in a listen-only mode. And then I'll turn all of your attention to our Safe Harbor statement in the event that any forward-looking-statements are made during the call today. We are going to kick it off today with Mike Lawton, our Chief Financial Officer, who has some prepared remarks.

Michael T. Lawton, Chief Financial Officer & Executive Vice President

Thank you, Lynn, and good morning, everyone. I am pleased to report that we delivered solid results for our shareholders during the quarter. Our international and our domestic divisions posted strong same-store sales growth. We opened a significant number of new stores and our adjusted EPS grew 15.3% over the prior year quarter.

I'll start my review of the quarter by looking at our system-wide sales, which are also known as global retail sales. And these are the total retail sales at franchise and company-owned stores worldwide. Global retail sales grew 9.1%. Foreign currency was a headwind and when we exclude the adverse impact of foreign currency, global retail sales grew by 11.3%.

The drivers of this growth included domestic same-store sales, which rose 4.9% in the quarter, lapping a positive 6.2% from last year. This was comprised of franchisee same-store sales, which were up 5.2% and company-owned stores, which were up 1.5%. Although we don't provide specifics of order count and ticket for competitive reasons, we did drive an increase in both order counts and ticket this quarter.

Also, we're pleased to report that we opened five net domestic stores consisting of 14 store openings and 9 closures. In the full year of 2013, we had a growth of 58 net stores and our goal is to exceed that this year domestically.

Our international division had another very strong quarter as same-store sales grew 7.4%, lapping a solid prior year quarter increase of 6.5%. Our international division grew by 97 stores this quarter, made up of 109 store openings and 12 closures.

Turning to revenues, total revenues were up $36.2 million or 8.7% from the prior year. This increase was primarily a result of three factors. First, higher supply chain revenues, resulting mainly from an increase in commodity prices and higher volumes. Second, higher international royalty and supply chain revenues due to increased same-store sales growth and store count growth. And third, higher domestic royalty revenues due to same-store sales growth and the positive impact of increase in our store count over the trailing four quarters.

Moving on to operating margin; as a percentage of revenues, consolidated operating margin for the quarter decreased to 30.2% from 31.1% in the prior year quarter. Some of the drivers of this decrease included the following: Company-owned store operating margins decreased slightly as a percentage of revenues due primarily to higher food cost and our supply chain margin percentage decreased from 11.3% to 10.5% due primarily to an increase in commodity cost.

The average cheese block price in the first quarter was $2.16 per pound versus $1.67 in the same period last year. Pork and other meats also increased during the quarter which led to our overall market basket increasing 6.9% during the quarter.

As a reminder, food commodities are generally priced on a constant dollar markup to our franchisees, therefore, higher commodity prices do not impact our supply chain dollar profit. They do, however, negatively impact our supply chain margin as a percentage of revenues. Because of the increasing commodity prices, we need to make a significant update to our commodity projections. We have previously communicated that we expect that commodities would be flat or down to as much as 2% in 2014. Due to the recent increase in commodities primarily cheese and pork, we now expect that commodities we use in our system will be up 4% to 6% in 2014 versus 2013 levels.

Despite the fact that we have diversified monetary risk, currency exchange rates negatively impacted us this quarter by about $1.3 million versus the prior year quarter due to the dollar strengthening against most currencies. We continue to expect that currency exchange rates will be a headwind for us for the remainder of the year.

Turning to G&A expenses, G&A decreased by $1.4 million or 2.6% quarter-over-quarter, primarily driven by a $1.7 million pre-tax gain on the sale of 14 corporate stores that we detail as an item affecting comparability in our 8-K. Going forward, the sale of these stores will shift some income from corporate stores into franchise royalties.

We've previously indicated that our estimated full year G&A would increase an additional $5 million to $9 million over 2013 levels due to increases for e-commerce and technological support, international support, and the growth of the team there and other strategic initiatives offset by lower non-cash comp expect. We now expect our full year G&A will increase $4 million to $8 million over 2013, primarily a result of the gain that I previously mentioned. Keep in mind too that G&A expense can vary up or down depending upon such things as our performance against plan, which affects our variable performance-based compensation.

Regarding income taxes, our reported effective tax rate was 36.6% for the quarter which is slightly below our expected range due to the reversal of a deferred tax valuation allowance that we also detail as an item affecting comparability in our 8-K. We currently expect our effective tax rate for the foreseeable future to be in the 37% to 38% range.

Our first quarter net income was up $6.1 million or 17.6%. This increase was primarily driven by higher domestic and international same-store sales, international store growth, and the $1.4 million after-tax gain on the sale of 14 corporate stores, all of this offset in part by the negative impact of foreign currency exchange rates.

Our first quarter diluted EPS as reported on a GAAP basis was $0.71. On an as-adjusted basis, our diluted EPS was $0.68 for the first quarter. The $0.68 was a $0.09 or 15.3% increase from the $0.59 in the first quarter of last year. Here is how the $0.09 difference breaks down: Our improved operating results benefited us by $0.09. Foreign currency negatively impacted us by about $0.02, lower diluted share count, primarily due to our share repurchases, benefited us by $0.01 and lower interest expense benefited us by $0.01.

Turning to our use of cash; during the first quarter, we repurchased and retired approximately 221,000 shares for $15.1 million at an average price of $68 a share. So far in the second quarter, we've repurchased 154,000 shares. We also returned over $11 million to our shareholders in the form of a quarterly dividend.

We did make a required $5.9 million principal amortization payment in the first quarter. Due to the terms of our debt, we will also be making a $5.9 million required principal amortization payment in the second quarter of 2014. Although we had expected that we'd be able to stop making required payments in the second quarter due to meeting the 4.5 times ratio specified in our agreements, we didn't meet this threshold.

Debt to EBITDA, which you can see in the financials and is the closest approximation that a financial statement user can see to the actual ratio we need in order to cease making required payments. But the actual calculation is impacted by cash movements within our securitization structure that did not impact - they don't impact operations or financials but they did impact our ability to meet the ratio. Going forward, we will continue to evaluate the opportunity to cease making required payments once the specific securitization terms are met.

In closing, we're very pleased with the results in the quarter. We will continue to focus on improving our operating performance, growing our global store base and utilizing our free cash flow to drive shareholder value.

Thank you for your time, and now we'll turn it over to Patrick.

J. Patrick Doyle, President, Chief Executive Officer & Director

Thanks Mike. As you heard, this quarter's headline is that we once again delivered strong consistent results and we're particularly pleased with the store growth in our international division which was especially robust. Overall, it was a great start to the year. We had a busy first quarter: domestically we had strong sales results, good order growth over last year and a great promotion for our Handmade Pan Pizza. Our advertising featured our very talented store team members and I'm delighted that this campaign seems to have resonated well with our customers.

We also wrapped up our analysis of franchisee profitability in 2013 and we're pleased to see that profits continued to increase. Franchisees reported that store level EBITDA was up to about $82,000 last year from $75,000 in 2012. We continue to focus on this important metric because increasing per store profitability results in a healthier franchisee base; and with a higher return on investment in stores, it ultimately helps drive store growth.

It also puts our system in a better place for store re-imaging. We've been ramping up the process of getting stores updated across the system with our corporate stores leading the way. We're well underway to having our Team USA stores re-imaged in the next two years to three years.

Another area of intense focus for us right now is corporate store performance. Company same-store sales performance has lagged franchise stores in a meaningful way for the past two quarters. While we'll take a little time to get these stores where we want them, we want you to know that we're working to turn these results around.

During the quarter, there was a fair amount of discussion about the particularly cold and snowy weather in much of the country and its possible impact on our business. Typically, weather does not have an impact on our quarterly sales because it tends to be very regional and also short in duration. However, this winter was atypical. Our best estimate is that weather drove between 1% and 1.5% positive impact on sales in the quarter.

Moving to new product news, in the U.S., we recently launched our first new food product since the Handmade Pan Pizza in the fall of 2012; it's called Specialty Chicken, it's boneless chicken with a pizza twist. We know that chicken is a popular side item for us and that boneless chicken sales have grown 11% in the last three years for the whole quick service industry. This product gives us the opportunity to showcase chicken and do it in a way that's unique to Domino's. It's also a product that's good for store profitability which is important to our system and brings some new product news to our brand.

On the international front, we had some great milestones in key markets. In India, we opened our 700th store, a huge achievement for the fastest growing market in our system. By focusing on both quality and service, they've been pioneers and are dominating the fast food market in India. Despite the fact the economy is going through a rough patch, store unit economics are still strong enough to sustain robust store growth and they're expanding into new cities. We're very proud of their accomplishments.

We're also pleased with the progress being made in Japan where we recently opened our 300th store. Since been acquired by our Australian master franchisee, this market has continued its strong performance with excellent sales and store growth. We continue to be very optimistic about the changes and growth opportunities in that market.

I recently visited Australia and I'm impressed with what our master franchisee is doing in that market. They not only continue to build profitable stores in a fairly mature market, but they also have really stepped up their game in service and product quality. Plus they have excellent marketing which is helping to keep the brand dominant in their market.

While I am highlighting some markets, I'd like to point out a recent agreement we signed in South Africa with a new master franchisee. Taste Holdings is based in Johannesburg, they are publicly traded company that operates nearly 150 pizza restaurants under the Scooters Pizza and St. Elmo's pizza brands. We expect a vast majority of these will be converting to Domino's Pizza units in late 2014 and through 2015. This gives us an excellent entry into the southern region of Africa which is a continent with attractive future growth opportunities for our brands. It's young, it's increasingly very digital with good mobile phone penetration, an emerging consumer class, growing urbanization, and a modernizing retail sector. In terms of population and consumer purchasing power, Sub-Saharan Africa is roughly the same size as India. Stay tuned for more from this region of the world.

While our international business is certainly a major driver of growth, technology also continues to advance our brands as we lead the industry with technological innovation. This week, we launched an iPad app that features amazing images that take advantage of the iPad's high definition Retina display. The team used gaming and animation software to power the incredible 3D graphics of our new Pizza Builder. It's a great app and I'd encourage you to try it out.

We also recently announced that our Android app will accept payment with Google Wallet, which is a free mobile payment system that allows customers to store debit cards, credit cards, loyalty cards, and gift cards electronically on their mobile phone. It's just the kind of flexibility and convenience we feel is important for us to offer to our consumers and apparently Google thought it was pretty cool that we signed up since they called it out specifically on their earnings call.

Another consumer convenience we've discussed before is profiles, which is the ability for consumers to store their pizza orders and credit card information. We added about 2 million more profiles in the first quarter. So, we're now up to 9 million profiles and about half of our more app sales were made using established profiles in the first quarter.

Overall, digital now comprises 45% of our sales with some recent weeks at 50% of sales. We're really delighted with what digital ordering is doing for our business in the U.S. and around the world.

Finally I'd just add that we're off to a great start this year. We grew stores at a nice cliff, had robust domestic and international sales and, despite some headwinds from FX and food costs, delivered strong EPS growth once again. That enabled us to pay an increased dividend and buyback a significant number of shares, more continued evidence of our commitment to shareholder returns. I'm very proud of our team and our results. Our franchisees are running great businesses all around the world and they're doing so under a name brand with increasing recognition and strength.

With that, I'll be happy to take any questions.


Operator: Thank you. [Operator Instructions] And your first question is from the line of Jeffrey Bernstein with Barclays.

<Q - Jeffrey Bernstein - Barclays Capital, Inc.>: Good morning, thank you. A couple of questions on international, obviously a very impressive start to the year at least from a comp annual perspective - Just wondering you mentioned something about the royalty rates. Just wondering the frequency of I guess of opportunity you have to update the royalty rates both in international and domestically, maybe you can give some sort of range in terms of a high versus low of those percentages. It would seem like over time, with a very strong performance, there will be the opportunity to increase those rates and then I had a follow up.

<A - Patrick Doyle - Domino's Pizza, Inc.>: Yeah, so the opportunity on the international site is very rare. We have very long-term contracts with our master franchisees and ultimately those contracts and their confidence that they're going to be able to build the Domino's business and generate a great return for themselves or their shareholders if they're public, that's what attracts capital and that's what's generated the strongest growth really in international of any of the major players in the restaurant industry. So those opportunities are very rare, our average as we've said before is around 3%. Our master franchisees themselves have some ability to change their rates to sub-franchisees and if that happens, then we've got some ability to do something, but overall you're not going to see material changes in those rates.

<Q - Jeffrey Bernstein - Barclays Capital, Inc.>: In the U.S., how does that compare to, in U.S. obviously you don't have big master franchisees, but what's the range and the average now?

<A - Patrick Doyle - Domino's Pizza, Inc.>: Yeah, I mean our contracts are 5.5% with some incentives out there, we may be just slightly below that, I think we're between 5.4% and 5.5% average and it's been that way for a very long time. So, I would not expect anything there.

<Q - Jeffrey Bernstein - Barclays Capital, Inc.>: Got you and just in terms of the sales mix, obviously you're now pushing a little bit more into, well, I guess, the chicken is the most recent push, just wondering whether you can give any directional color in terms of however you slice it, whether it's value versus premium on your domestic sales mix, or pizza versus proteins versus size, just wondering the trends over time and it sounds like you're pretty happy with the profitability of the chicken, so I am wondering if you could rank the profitability of each kind of the big core components of your menu.

<A - Patrick Doyle - Domino's Pizza, Inc.>: Well, pizza is a great business and that's the core driver of comp growth. It is certainly where the vast majority of profitability comes from in our system. Chicken is a great part of our business, it's the second largest part of our business, but it is materially smaller than our pizza business, but it's a good sized business. And right now, given the way commodities have been moving, the fact that we've got a chicken focused promotion out there right now is a good thing and nicely timed.

But ultimately you're talking about value or premium, our pricing has been quite consistent now over the course of four years or five years and that's really a reflection of where consumers are and the value that consumers demand. And as long as that's what they're looking for and we're continuing to drive growth in our franchisees' profitability, which as I mentioned previously we did again quite nicely in 2013, we're going to be pretty consistent in our approach to pricing.

<Q - Jeffrey Bernstein - Barclays Capital, Inc.>: Got it. Lastly, Mike if I could just - actually you mentioned you're looking at which quarter you can stop making that $5.9 million payment once the rate gets to a low enough level from leverage. You didn't mention anything about a potential boost to the leverage again I wasn't sure whether - where rates are today, it's just not as compelling and that's why you are more focused on getting the leverage down to that certain level so you can stop making those payments?

<A - Mike Lawton - Domino's Pizza, Inc.>: Right now, we continue to watch where rates are, but it's not, as you say, it's not that compelling. And we expected that we would stop making the payment probably, still a high probability that that would stop next quarter. And we'll just continue to watch. We're quite content with where we are which is at the 4.5 times level.

<Q - Jeffrey Bernstein - Barclays Capital, Inc.>: Got it. Thank you very much.

Operator: And your next question is from the line of Mark Smith with Feltl & Company.

<Q - Mark Smith - Feltl & Co.>: Hi guys, just want to follow up on commodity inflation and competitive environment. What's your opportunity to take price today?

<A - Mike Lawton - Domino's Pizza, Inc.>: Well, as I mentioned in my part, we did take, the ticket is up a little bit, and that's not really from taking price as much as being very careful and sharp on the coupons that you do offer. As I know you're aware most of the transactions that take place have got some kind of a deal associated with them. So, I don't think - I think, there's more opportunity to be careful about your couponing than there is to take menu price up at this point in time.

And while you may see a little bit of adjustment, I wouldn't expect anything major, as long as - our current expectation is commodity prices will come back down. It's taken longer than we expected. We got exactly what we expected out of chicken which is meaningful, and that's more work. It's really a pork and cheese situation right now and making a presumption that they hopefully will still come back down fairly in either the second or at worst third quarter. I don't think you'll see a lot of pricing adjustment.

<Q - Mark Smith - Feltl & Co.>: Does this give you an opportunity as we've seen the trend of mom and pops kind of going away and to new, smaller regional guys, does this give you an opportunity over the next year to add more domestically as you can withstand some of these pressures better than smaller peers can?

<A - Patrick Doyle - Domino's Pizza, Inc.>: Yes. No, that's absolutely, we think our size and scale and ability to buy effectively and pass those savings through to our stores is clearly a strong competitive advantage; and so, yes I think it does put us in a stronger position from a share standpoint.

<Q - Mark Smith - Feltl & Co.>: Perfect. Thank you.

Operator: And your next question is from the line of Joe Buckley with Bank of America Merrill Lynch.

<Q>: Hi, it's [ph] Andrew (25:00) for Joe. You called out the underperformance of company stores compared to franchisees over the last several quarters. Considering the re-franchising activity during the quarter, does it make sense to further re-franchise as is evidenced your franchisees are great operators?

<A - Patrick Doyle - Domino's Pizza, Inc.>: Our franchisees are great operators and I would tell you there have been times when our corporate stores have outperformed the franchise side and the other way around. Right now, we are in a moment where the last two quarters we've had some pretty material underperformance, there's some execution issues that we've got to get fixed.

We like where we are with our store counts on the corporate side today. We use it as not only a way to generate good returns for our shareholders and at the profitability levels we have today, we do that. We use it to test new things and that's important for us, but I'll tell you critically and I think fundamental to why we run stores is it's where we develop talent to lead our franchise system both domestically and around the world. So based on that, I would tell I think we're pretty comfortable in the range that we are in. We've always said from time to time you're going to see some opportunistic transactions both buying and selling and you're going to see us building stores importantly. So, there is not necessarily a magic number, but I would tell you the range we're in today, with the level of talent we're able to generate through there to meet our needs, and the returns we're generating out of the stores, we feel pretty good about where we are.

<Q>: Okay. And just one more, can you just talk a little bit more about the remodeling program; for instance how many you did this quarter and any insights you're learning such as the mix of carryout growing and if guest counts or remodel stores are outpacing the system?

<A - Patrick Doyle - Domino's Pizza, Inc.>: It's you know what, it's still fairly early on that and I would tell you as we just announced out to our system now what three, four months ago, those efforts are just ramping up now. I think you're going to start seeing a lot of re-images starting kind of second half of this year. So, we've got a couple of hundred out there today that have been done over the course of the last year to 18 months. That number hasn't really materially changed in the first quarter. I think second half and then the years out from that is when you're going to see most of that activity.

<Q>: Okay. Thank you.

Operator: Your next question is from the line of Alvin Concepcion with Citi.

<Q - Alvin Concepcion - Citigroup Global Markets Inc. (Broker)>: Thank you. Just a couple of questions related to the Pan Pizza, it seems it's brought on some incremental new customers and the product seems to have long-term staying power and now that you've had it over a year and a half, what have you seen in regards to loyalty from those customers you've taken on? And when they do return, do those customers always tend to come back for the Pan or do they have a propensity to try other items you're promoting?

<A - Patrick Doyle - Domino's Pizza, Inc.>: You know what, they buy both Pan and Hand-Tossed and when we launched this Pan, we knew that there were Pan occasions that were going to competition frankly from our customers. So people, who are buying our hand-tossed pizzas, wanted to change the pace and they were going elsewhere because we didn't have a good offering. And so this has really mostly been about picking up more occasions from our existing customers who are taking their pan pizza business elsewhere. But what that has meant is higher loyalty from those customers as they are giving us both of those occasions. So we continue to be very pleased with how it's performing, it's a terrific product. And as you saw again in the first quarter, it's had some real staying power for us with our customer base.

<Q - Alvin Concepcion - Citigroup Global Markets Inc. (Broker)>: Okay, thanks for that color. And finally you mentioned 45% of your sales are now digital, can you talk about what that's done for store profitability or even productivity as that mix has increased over the past year?

<A - Patrick Doyle - Domino's Pizza, Inc.>: Yeah, it absolutely helps and it helps on essentially every measure. The ticket is higher, order accuracy is higher for the customers since they are taking their own orders so customer satisfaction is higher and the profitability of the order is a little bit better as well. And it's also more efficient to market to those people who've already signed up, and we continue to make advances. So with the profiles set up, the ability for those customers to re-order quickly if they set up profiles is terrific. So it continues to be a very positive thing for our business and certainly an area where you're going to continue to see focus. But as we said, just in the last month or two now you've seen a number of other things, Google Wallet, the iPad app, we're continuing to drive innovation at a very high pace in this area and it's something that is going to continue to be part of our core strategy.

<Q - Alvin Concepcion - Citigroup Global Markets Inc. (Broker)>: Great, thank you very much.

Operator: Your next question is from the line of Alton Stump with Longbow Research.

<Q - Alton Stump - Longbow Research LLC>: Good morning and good jump on the quarter.

<A - Patrick Doyle - Domino's Pizza, Inc.>: Thank you.

<Q - Alton Stump - Longbow Research LLC>: I guess just a follow up on the pricing question earlier; obviously I think that was in reference more to company-owned stores, but on the franchise front in the U.S., are you getting any feedback from them on average, if they plan to take any pricing given the cheese cost is moving up so hard here over the last couple of months?

<A - Patrick Doyle - Domino's Pizza, Inc.>: Yeah, we all watch it and it is certainly an area that we will all talk about, none of us likes to see record high on cheese and obviously pork moved as well. I actually commend our franchisees, I think they've been remarkably disciplined about recognizing that this is relatively short-term and about just taking some of that in the first quarter.

That said, our franchisees still did very well in the first quarter and we think their profits were actually up a little bit versus the first quarter of the previous year, but not a lot but a little and the volume clearly that we saw in the first quarter carry today and they understand that's sales growth and keeping our customer base happy and loyal is ultimately what's going to drive long-term profitability and growth in the business.

So, overall, I think they have been remarkably disciplined about looking at this for what it is which has been a relatively short-term movement that persisted a little longer than frankly we had hoped it was going to. But we're already seeing some easing on cheese, it's backed down some over the course of the last couple of weeks. Hopefully, that will continue but overall, they've been quite disciplined.

<Q - Alton Stump - Longbow Research LLC>: Well, you know, I was actually asking you, like our job isn't to be cheese cost experts, but we are seeing quite a bit of relief over the last three weeks or four weeks here, any outlook if it could head down further from here?

<A - Patrick Doyle - Domino's Pizza, Inc.>: Our expectation is that it is going to continue to ease, we don't think it's going to happen quickly, but over the next few months or couple of quarters, our expectation and certainly the market's expectation as you look at forward curves is that it's going to continue to come down. We'll see. There have been couple of components that have driven it. One was weather and there were some areas where production per cow was down because of the extreme weather. Obviously as we're warming up now, that's going to get somewhat better and production should get better.

Input costs are very good, corn costs, feed costs are very good but the other part of it has been the export market and dairy exports in general have been up and that's driven the demand side overall on this. And so we'll see. Our expectation is that it's going to continue to ease but it's going to take some time for that, we're going to be watching it closely but over the next couple of quarters, we're hopeful that we're going to see it down somewhat more.

<Q - Alton Stump - Longbow Research LLC>: Okay thank you. And then I had just one quick follow up and then I'll hop back in the queue. As we kind of think about this chicken launch, obviously it's very early, just last couple weeks here. But any color even as rolling this out in test market or in the group studies, how this compared to some of your recent launches which has obviously been very successful whether it's a Pan Pizza or prior to that. Any color on that front that you can give us?

<A - Patrick Doyle - Domino's Pizza, Inc.>: Yeah, I mean that's all in the second quarter, so I really can't get into that.

<Q - Alton Stump - Longbow Research LLC>: Okay. That's all I have. Thank you, guys.

<A - Patrick Doyle - Domino's Pizza, Inc.>: Thank you.

Operator: Your next question is from the line of Brian Bittner with Oppenheimer.

<Q - Brian Bittner - Oppenheimer & Co., Inc. (Broker)>: Thank you. Hi, guys.

<A - Patrick Doyle - Domino's Pizza, Inc.>: Hi, Brian.

<A - Mike Lawton - Domino's Pizza, Inc.>: hi, Brian

<Q - Brian Bittner - Oppenheimer & Co., Inc. (Broker)>: First on the U.S. comps, you brought up winter weather helping you 100 basis points to 150 basis points, first question is, how did you come up with that estimate?

And then the second question on these U.S. comps is, even after that acceleration, the two-year trend actually accelerated almost 300 basis points. So after you answer the weather question, if you can just go into some other dynamics that drove the acceleration in the first quarter, anything you can point out from, obviously technology continues to help from a technological market share menu mix perspective will be helpful.

<A - Mike Lawton - Domino's Pizza, Inc.>: Okay, I'll take the weather question. What we did was we ran everything through our media mix model and we looked at what we expected by market versus what we got. So I can tell we have a pretty sophisticated model but at the same time you have to take it all with a bit of a guess as to what the right numbers are. But we've always tried to give you the best picture we can as to what we think is happening. So after running it through the model, we looked at - and that includes looking at markets where there isn't any impact from snow areas where you got more snow than what we had the year before, areas with less snow that are impacted and we come out with something in this range of 1% to 1.5%.

<A - Patrick Doyle - Domino's Pizza, Inc.>: The only thing I would add to that Brian is we also then just as kind of all right, does this all make sense, we looked at our carryout and delivery mix ends and our delivery mix was a little stronger than we would have expected otherwise which was clearly a function of the weather as well. So, we think it was kind of in that point to point-and-a-half range and obviously the blend between our carryout and delivery business insulates us somewhat.

To your other question about kind of what's driving the comps, I think there have been a few things. I think we've done a good job buying our media and our media has been up a little bit over the course of the last few years just from not only efficiency standpoint but effectiveness and some of that is just a function of the growth of the system. And the more we're driving comps, the more dollars that we've got to put back into driving the brands.

Clearly an important part of this though is digital and I think digital continues to be a strong part of our business. We see the effect it has on customer retention and frequency and that has clearly been a big driver of our results and continues to be a big driver of our results. And overall, the execution from our system and our franchisees has been strong and we're seeing great results from them as we look at our kind of internal measures of the service level that they're giving and their execution, I'm proud of our franchisees and our whole system and how they're performing and that builds overall momentum within the system as well.

<Q - Brian Bittner - Oppenheimer & Co., Inc. (Broker)>: Okay and have you told us what percent of the corporate stores are re-imaged as of now?

<A - Patrick Doyle - Domino's Pizza, Inc.>: Yes, I think we haven't, but I think it's in the range of about 25% of them right now.

<Q - Brian Bittner - Oppenheimer & Co., Inc. (Broker)>: Okay.

<A - Patrick Doyle - Domino's Pizza, Inc.>: I think it's around 100 stores, maybe just slightly over 100 stores of them today are re-imaged.

<Q - Brian Bittner - Oppenheimer & Co., Inc. (Broker)>: Okay, because I thought it was more, because I'm trying to better understand the comp underperformance at the corporate level and you talked about kind of execution being done, I was just wondering if there's anything, any correlation between execution and the store re-image or anything like that but it seems that 25%, it must be, it's just not really having an impact yet anyway?

<A - Patrick Doyle - Domino's Pizza, Inc.>: It's just, it's straight up execution.

<Q - Brian Bittner - Oppenheimer & Co., Inc. (Broker)>: Okay, and then the last question, the $4 million to $8 million of G&A year-over-year, Mike, did you say that includes the gain on the sale?

<A - Mike Lawton - Domino's Pizza, Inc.>: Yes.

<Q - Brian Bittner - Oppenheimer & Co., Inc. (Broker)>: Okay, all right great. Thanks.

<A - Mike Lawton - Domino's Pizza, Inc.>: The primary reason that we reduced the increase is just to reflect that we got the kind of unusual gain in there.

<Q - Brian Bittner - Oppenheimer & Co., Inc. (Broker)>: Got it, thanks.

Operator: Your next question is from the line of John Glass with Morgan Stanley.

<Q - John Glass - Morgan Stanley & Co. LLC>: You talked about the majority of pizza sales are still on a deal and that sort of reminded me of that persistence in the industry. How much less of a deal have you been able to sell pizzas on, when you do it on mobile or through the Internet? Is there a material difference? And I guess related to that, how close are you to be able to do one-on-one marketing so that you are not offering me a deal if I wasn't going to take one anyway to improve your profitability that way?

<A - Patrick Doyle - Domino's Pizza, Inc.>: Yeah, you know, it's interesting, customers online tend to use coupons a little bit less. Even though they're there and in front of them, they use them a little bit less and it's part of why ticket is somewhat higher, they also just add more food items for the digital orders, but that's a fairly small effect on that.

So, I think overall we kind of look at three buckets of orders. We look at orders that are going out at menu price, we look at those that are on kind of the national offer and those that use local coupons and you can kind of manage pricing within each of those three areas. And overall, there is some effect with the digital that's clearly been a little bit positive for the ticket over time and that's kind of how we think about it I guess is kind of looking at each of those three areas, what's going to drive volume and then managing the profitability within it.

<Q - John Glass - Morgan Stanley & Co. LLC>: And just following up on that, so if you decided not to show coupons to customers as they logged in, you think that's a dangerous precedent that they're going to end up thinking you end up being more expensive than your competition?

<A - Patrick Doyle - Domino's Pizza, Inc.>: No, coupons have to be there, if the coupons are available to any customers, we're going to have them there for them online and they've got to know that they've got access to great value digitally when they're ordering.

<Q - John Glass - Morgan Stanley & Co. LLC>: And then just the last piece that is, when do you start to or have you already begun to send people individual offers either because they haven't ordered as often in the past or if you want to up-sell them something specific, how have you done that so far and are there any plans to increase that?

<A - Patrick Doyle - Domino's Pizza, Inc.>: Yeah, you know what, we've done some things in terms of targeting groups but there is lots more to come as we get more sophisticated about managing kind of our data base and people within it, there's still lots of opportunities on that front for us going forward.

<Q - John Glass - Morgan Stanley & Co. LLC>: Thank you.

Operator: And your next question is from the line of John Ivankoe with JPMorgan.

<Q - John Ivankoe - JPMorgan Securities LLC>: Hi, great, thank you. As you've seen a significant up-tick in the number of people with profiles, how have you seen that customer change if at all from having a profile to not having a profile in terms of things like order incidence, average ticket, and maybe in reference to the previous question, your ability to communicate to that profile holding customer directly, in other words how good is this for Domino's Pizza?

<A - Patrick Doyle - Domino's Pizza, Inc.>: Yeah, it's a positive on all fronts. And once they've given us that information and particularly if they put credit card in, their ability to get through the process quickly and their ability to access favorite orders quickly, all of that is a positive for the customer, so it's a positive for us and we can see it in behavior.

<Q - John Ivankoe - JPMorgan Securities LLC>: Excuse me and by behavior you mean that customer is ordering more often and maybe ordering a little bit more, I mean that could - just that there has been an increase in digital ordering, do you kind of view profiles as another leg as a future sales driver?

<A - Patrick Doyle - Domino's Pizza, Inc.>: Yes, we do.

<Q - John Ivankoe - JPMorgan Securities LLC>: Okay. Thank you.

<A - Patrick Doyle - Domino's Pizza, Inc.>: Thanks John.

Operator: And this question is from the line of Peter Saleh with Telsey Advisory Group.

<Q - Peter Saleh - Telsey Advisory Group LLC>: Great, thanks. I just wanted to ask about the marketing spend in the second quarter and maybe a little bit into the third quarter and how you are planning that with the World Cup this year, if you are planning to spend more dollars this year on advertising?

<A - Patrick Doyle - Domino's Pizza, Inc.>: Yeah, you're not going to see big shifts kind of because of that. Remember the way kind of our funding works on our advertising is it's a percentage of the sales from our store. So, as overall system sales increases, that means the absolute volume of those dollars is growing. But in terms of material shifts between quarters, you're not going to see any.

<Q - Peter Saleh - Telsey Advisory Group LLC>: Great. And then, can you just comment a little bit on the, I know there has been a lot of talk, a lot of headlines on the fast casual pizza space really starting to pick up steam here in terms of units and the growth and while it's still small I think when you look out the next couple of years I think it might be a little bit more significant. So, can you just comment on how you guys are planning to combat the growth in fast casual pizza?

<A - Patrick Doyle - Domino's Pizza, Inc.>: Yeah, we think that all of the things, we're talking about, do that effectively. So, getting our stores looking better, re-imaging our stores, building some new stores, putting them in better locations combined with better food than we've ever offered combined with a digital platform that we think is really second to none, having some seating in these re-imaged stores making it more welcoming for those who like to sit down as they wait or to eat as well. Really opening up the kitchens, so people can see the quality of the food, all of those things make us a better brand for consumers in general and make us more competitive within whatever the competitive set is going to be out the next few years. And I guess the only thing that I would repeat is that we continue to see the largest players in the category taking share from the independents. And so to the extent to which you're seeing some of these newer players growing a little bit, they are clearly not taking share from us today and potentially taking even more share from some of the other locals and independents as we also are taking share from those players.

<Q - Peter Saleh - Telsey Advisory Group LLC>: Thank you very much.

<A - Patrick Doyle - Domino's Pizza, Inc.>: Thank you Peter.

Operator: And there are no further questions. Are there closing remarks?

J. Patrick Doyle, President, Chief Executive Officer & Director

So, we appreciate all of you taking the time to be on the call and for the questions and we look forward to being back together with you on July 22 to discuss our second quarter earnings. Thank you everybody.

Operator: And this concludes today's conference call. Thank you for your participation. You may now disconnect.

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