達美樂 (DPZ) 2005 Q1 法說會逐字稿

Good morning. My name is Crystal and I will be your conference facilitator. At this time, I would like to welcome everyone to the Domino's Pizza first-quarter 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 period. (OPERATOR INSTRUCTIONS). Thank you. I would now like to turn the call over to Ms. Lynn Liddle, Executive Vice President of Communications and Investor Relations. Thank you. Ms. Liddle, you may begin your conference.

Thanks, Crystal, and good morning, everybody. Thanks for joining us as we discuss Domino's first-quarter financial results. On the call today, we're going to have the Domino's Chairman and Chief Executive Officer, David Brandon, and Domino's Chief Financial Officer, Harry Silverman. Mr. Brennan and Mr. Silverman will each present an overview of our results and then we'll open up the call to questions.

We do ask that members of the media be in a listen-only mode and each of you then will be asked to state your name and affiliation as you come up in the queue for questions. We do expect this call to take no longer than an hour of your time. As always, I'd like to note that our comments will include forward-looking statements, however, which may materially differ from future events. So we'll refer you to the Safe Harbor statement, which is listed in our news release. And with that, I would like to turn it over to Dave Brandon, Chairman and CEO.

Good morning, everyone, and thank you for joining us. Today marks our fourth conference call reporting as a public Company. And we are proud to report that our positive trends continue. We will likely long remember the first quarter of 2005 here at Domino's Pizza as a period when a number of key factors came together to produce some exceptional results.

Our top-line growth in the quarter was extremely strong. We achieved almost a 14% increase in global retail sales, resulting from our worldwide system of stores executing well during a very busy quarter of surging sales. We are also proud of the fact that we continued to demonstrate a consistent growth in our number of net new stores opened during this quarter. Our operating margins continued to expand during the quarter despite the fact that we had some increased food cost pressure, which I know Harry will talk about in a little while.

I'm also proud to report that we made solid progress in our Company-owned stores, which we've indicated we felt there is upside in that particular business unit and we are experiencing some of that now. Our marketing message, combined with increased advertising exposure, clearly resonated with consumers during the first quarter to drive the kind of sales results that we put on the board and we're very proud of that.

Based on the early positive results of our 2005 increased national advertising spend of 4% of sales and the great feedback we got from our franchisees, we will again be increasing our national advertising spend by shifting regional and local dollars to our national advertising fund. This will result in a 5% contribution to national marketing initiatives in 2006.

Now although the first quarter was certainly an extraordinary performance for us, I'd like to point out that our track record has been consistent and strong over the long haul. We are a 44-year brand with worldwide recognition as the leaders in our pizza delivery category. We have not had a negative annual same-store sales comparison in 11 years, which points out the fact that from time to time, our sales results will fluctuate from quarter to quarter and this quarter's fluctuation is more fun than some because certainly we experienced something very special. And if past holds true, we will occasionally experience negative quarterly comps as well. A lot of that will be driven by either competitive activity or our market plan and media schedule, but those quarterly fluctuations will occur. But we want to keep you focused on the fact that we have consistently performed well over any reasonable timeframe and again on an annual basis, when you have to go back 11 years to find the last year that we had a negative same-store sales year, we think that that's the best point that we can make in terms of our consistency. And this consistency in our sales performance is what allows us to continue to generate strong and growing cash flows year after year.

I would comment that the quick-service restaurant industry, particularly the pizza category, and I would even drill down a little further and say the pizza delivery segment of the pizza category, appears to be strengthening. Pizza has been outpacing total QSR in weekly same-store sales for seven of the last ten weeks according to NPD Crest. You've seen several quarters of solid same-store sales performance from the national pizza players in the category, led by Domino's. And speaking of Domino's leading, we have led in same-store sales performance for 11 of the last 17 quarters in our category. We believe that high fuel prices and higher fuel food costs are causing consumers to spend carefully and our recent results would indicate a strong consumer response to the value associated with our brand and our products.

Finally, we believe that we have demonstrated to existing and prospective shareholders that we can and will deploy our strong free cash flows in ways that will continue to benefit them. As you know, we increased our dividend by 54% in the fourth quarter of 2004 and we will pay our second quarterly dividend of $0.10 per share on June 30th. This is among the very highest dividend yields in our industry.

We also opportunistically repurchased over 4 million shares from one of our original investors, which was accretive to earnings and did not increase our public float.

And we continue to pay down debt, bringing our total leverage ratio down from 4 times, where it was at the time of the IPO, to under 3.5 times today.

I can never conclude my comments without pointing to the strength of our system and our team. Domino's Pizza is fortunate to have the best franchisees in the business and team members who join those franchisees to create a very talented and committed system of stores that is allowing our brand to continue to lead in a way that we think is very significant and very impressive. And I want to send out a personal thanks to all of them for a great quarter and that's appropriate based on the fact that many of them are shareholders as well. So with that, I'd like to turn it over to Harry and have him drill down a little carefully into the numbers.

Thanks, Dave, and good morning, everyone. Over the next few minutes, I'd like to provide you with a brief update on our first-quarter financial results. First off, as Dave said, we had an outstanding first quarter to start off the year. We were very pleased with our 25% EPS growth, which was driven by exceptionally strong same-store sales, as well as continued increases to our global store portfolio. With that in mind, let's review our financial results starting first with our top-line growth.

Our global retail sales increased 13.8% during the quarter, driven by robust same-store sales growth both domestically and internationally, as well as an increase in our worldwide store count. As for domestic same-store sales, we posted one of the best quarters in our 44-year history with consolidated comps up 11.2% and broken down, our Company-owned stores increased 13.8% while franchised stores were up 10.8.

Now as Dave just reminded you, you can and should expect some peaks and valleys in our quarterly comps. These can be the results of many moving parts, including new promotional ideas, changes in marketing spend, and prior-year results. As you can see, this was evidenced in the first quarter as our strong growth was driven by several of these factors, including a higher national marketing spend versus last year. This was partially the result of shifting money from our co-op spend to a more efficient national spend. We also benefited from very successful marketing and promotional activities. And finally, we were rolling over weaker comps from 2004.

Next, let's turn our attention to our international same-store sales. During the quarter, our international comps increased 8.5% on a constant dollar basis and we are proud to report that the first quarter marked our 45th consecutive quarter of international same-store sales increases. As far as store count, we ended the quarter with nearly 7800 stores. We were once again very pleased with the progress we made in adding new units to our global portfolio. During the quarter, we added 42 net stores and over the trailing four quarters, we added a net 326 units. We continue to see most of our growth coming from our international markets, which accounted for approximately 70% of the net stores added over the four trailing quarters.

Now that you have a good understanding of our primary top-line drivers, let's shift our attention to the income statement. Our total revenues for the quarter were nearly 370 million, up 16% from the year-ago level. Approximately 60% of this increase was attributable to our distribution business, which posted strong revenue growth as a result of an increase in domestic franchise retail sales and higher commodity costs, including cheese. The average cheese block price in the first quarter was $1.54 per pound versus $1.34 last year. Additionally, our revenues were positively impacted by higher global same-store sales and stores counts, which drove revenue increases in our domestic stores and international operations.

The final point on revenue that I'd like to make is to remind everyone that we believe global retail sales, not revenues, are the best gauge of our top-line performance since retail sales are not affected by changes in store mix or commodity prices.

Let's now take a look at our earnings, starting first with operating margins. During the quarter, our consolidated operating margin increased nearly $12 million to 93 million. The primary drivers behind this increase were higher domestic and international franchise royalty revenues resulting from the nearly 14% increase in global retail sales. Additionally, our operating margin was positively impacted by increases in Company-owned store retail sales and higher distribution values. Now offsetting these increases were margin pressures at our Company-owned stores resulting from higher commodity costs, primarily cheese, but we also experienced higher meat and paper costs during the quarter.

In percentage times, our consolidated operating margin was 25.2% of total revenue, which was actually a decline of 20 basis points from last year. Now our margins benefited greatly from the increase in domestic and international royalty revenue during the quarter, but these increases were not high enough to offset the impact of higher commodity costs, which pressure Company-owned store and distribution margin as a percent of revenues.

If we take a closer look at our Company-owned store margins, our actual dollar margin increased 2.2 million during the quarter, though our margins as a percent of revenues were relatively flat as compared to last year. Obviously, we benefited from the nearly 14% increase in same-store sales, but these gains were offset by a 9% increase in the average food basket to our stores, which contributed to a 2.8% increase in food costs as a percent of revenue.

The last item I'd like to mention in regards to margin percentages is the impact that higher cheese costs played in the percentage change versus last year. As we have mentioned before, cheese price changes are a pass-through in our distribution revenues and related cost of sales, and accordingly, we have no dollar impact on distribution income. However, cheese priced changes do impact operating margins as a percent of revenues. In fact, as the 2005 cheese price has been in effect last year, our 2004 consolidated margin as a percent of revenues would have been 24.9% versus the reported 25.4%. And this 50 basis point swing would have resulted in a 30 basis point improvement in our 2005 operating margin versus the reported 20 basis point decline.

As far as G&A costs, we experienced an increase of $4.9 million during the quarter. This increase was driven primarily by higher variable G&A costs, including higher expenses related to our performance-based bonus plan, which we refer to as our team achievement dividend or TAD program and higher advertising and incentive costs. In addition to these higher variable G&A expenses, we were also negatively impacted by rising insurance and depreciation costs during the quarter. As we have mentioned on earlier calls, our TAD program is a self funding plan and the actual expense may vary from quarter to quarter based on how we perform as compared to our board-approved targets. Based on our stronger than budgeted results in the first quarter, our TAD bonus expense increased nearly $1.5 million as compared to the first quarter in 2004.

Before I finish the review of our income statement, I would like to touch upon our interest expense for the quarter. Our net interest expense was $10.4 million, which was down 3.5 million from last year. This improvement was primarily the result of lower average debt balances and a reduction in our average borrowing rate. Our effective borrowing rate for the quarter was 5.3%, which was down from 5.8% in the first quarter of 2004. Going forward, we expect our overall effective borrowing rate to increase throughout the remainder of the year based on market interest rate trends and the rollover of certain interest rate swap agreements as outlined in our 10-Q.

Next, let's spend a moment and talk about our bottom-line earnings. Our net income for the quarter was $25 million, up from 18.4 million last year. (technical difficulty) EPS, we posted diluted EPS of $0.35 per share during the quarter versus a pro forma $0.28 last year. The 2004 pro forma EPS assumes that our July 2004 IPO occurred at the beginning of the year, which would have resulted in lower interest expense in the first quarter of 2004.

At this point, I'll once again remind you that in our 10-Q, we are required to show our 2004 EPS numbers based on our pre-IPO capital structure that was in place during the first quarter of 2004. We believe that the pro forma EPS number filed in the press release is a more meaningful number as it adjusts for our recent IPO.

If we move to the balance sheet, our total debt stood at approximately $752 million at the end of the quarter, which was down nearly 29 million since year end. And this was primarily the result of a $25 million voluntary prepayment made on our senior secured credit facility during the quarter. Our total leverage ratio at the end of the first quarter was 3.4 times EBITDA, which was an improvement from our year-end leverage ratio of 3.6 times.

Next, let's take a look at our capital spending. During the first quarter, we incurred approximately 6.7 million of CapEx spending, which was relatively flat with the $6.8 million incurred last year during the first quarter. We're still comfortable with our 2005 CapEx guidance of 25 to $30 million for normalized capital expenditures plus approximately $10 million for the completion of our World Resource Center renovation, for a grand total of 35 to $40 million in total CapEx in 2005.

One final item to note, early in the second quarter, we repurchased and retired 4.4 million shares of common stock from JPMorgan Capital for 75 million or $17.01 per share. We financed this transaction with cash on hand and borrowed approximately 40 million on our revolver, of which we have already paid down 15 million to date. We felt that this opportunity to repurchase these shares was an effective use of our free cash flow as it first off reduced the total number of shares outstanding, it did not impact our public float as these shares were not registered, and finally, it will save the Company approximately $1.8 million in annual dividends. We estimate that this repurchase will increase diluted EPS by approximately $0.03 to $0.04 per share in fiscal 2005. This concludes our financial update. Once again, we want to thank you for your time today. And with that, Dave and I would like to open it up for questions.

(OPERATOR INSTRUCTIONS). Joe Buckley, Bear Stearns.

Thank you. I had a couple of questions. Just trying to put the sales performance of the first quarter into perspective, you commented and said it was an extraordinary quarter. You've also talked about the pizza category being stronger and obviously, you must be attributing some of the sales increase to the national ad spend as you stepped up again in '06. I know on a normalized basis, we tend to think of Domino's as generating -- likely to generate -- low-positive single digit same-store sales. Should we be ratcheting up those expectations some, not to 11%, I'm not implying, but some over the next two years based on the national ad spend shipped and some other things in the category?

Well, Joe, we believe that the 1 to 3% kind of long-range guidance that we provided is appropriate. And we believe that because it is our personality as a Company and it's certainly our marketing philosophy to try to hit a lot of singles and doubles as evidenced by our 11 straight years of positive same-store sales. And I would characterize the first quarter as one where we swung for a double and we hit it over the fence. And certainly we don't plan or anticipate to be able to deliver these kind of results quarter after quarter. But having said that, there's a lot of momentum in the business right now and there's a lot of momentum at Domino's Pizza. And we do believe that the incremental national marketing spend has made a significant difference this year and we also believe that we'll make a significant difference next year as we step up another full percentage point in terms of how we're funding that national advertising fund. We think it gives us more reach with our television, more reach with our print, and more marketing alternatives that we can use to continue to drive the brand and the call to action with our customers.

So we feel very good. We've got very strong momentum. We've got a great pipeline of new products. We've got a marketing message that's working very well. And so we feel very, very good right now, but I would not recommend that we overreact to the exceptional level of performance that we achieved in the first quarter.

Dave, can you give us some sense of how the comps trended during the quarter just so we get some sense of how the 11% came together? And maybe if you would, just give us an update of how you're doing quarter to date?

The first quarter was one that was just absolutely steady, not a big peak and valley volatile kind of performance. It was just a very, very steady, positive same-store sales performance and I would also add not only domestically, but internationally. I think it's important to point out that internationally, an 8.5% growth rate there when you're a business that's comping now 45 consecutive quarters of positive same-store sales, is not to be overlooked.

So we believe that the performance we had in the first quarter both domestically and internationally was something that was very consistent and very steady and we carried good momentum into the second quarter. I'm not in a position to say any more about the second quarter at this time.

Okay and one last question. The Company stores were obviously very, very strong. I know you had a change in management there, I believe last October. Any operational changes we should be aware of that may be contributing to that?

I just think we're executing better and I'm really pleased with the leadership that we have in place. Patrick Doyle and the team that he has assembled is doing a very, very good job of adding value to that business, both in terms of our marketing execution, as well as our day-to-day store execution. We still have upside in that business, but we've certainly taken a very positive step forward. We want to remind everybody that we are primarily a franchise model and that's what really drives our success. That's kind of the way that we think about this business. But the corporate unit is one that does have upside. We've seen some of that in the first quarter and hopefully we can continue that into the future.

Okay, thank you.

John Ivankoe, JPMorgan.

Thanks. Very good quarter. Just actually following up on Joe's question on your Company store performance, I think he asked about whether there's anything operationally we should be aware of. Should we, David, just really just hang our hat on the fact that it is the new management and it's just increased focus on the Company store side? Or are there a few specific things that you can point to that are being put in place that might continue for some time?

Yes, John, we really believe that it's a combination of a number of factors as it always is in this business. As you know, we've made a significant capital investment over the last few years in relocating and reimaging those stores. We've installed the new Pulse point-of-sale system, which has, we think, really puts those stores in a position where we can do things from a marketing, database marketing perspective and customer service viewpoint that are powerful and important. But it's all about the people. And as we continue to put the right people in the right places to drive the energy and the management aspect of operating 600 stores, we think that that's probably been the most near-term change. That again, the leadership that we have in place now and the team that we've assembled around that leadership is gaining momentum, gaining confidence, and I think starting to make some significant incremental improvements that should sustain themselves. So it's the nature of QSR. There's never one lever you can pull and everything changes. It's a combination of a number of smaller levers. And that's what we think is occurring in our corporate store unit.

Okay, that's great. And I actually had a follow-up on advertising as well. Something that we've learned over time is your local store advertising is something that's always an important component of the business and I think every company certainly has it as a part of their overall marketing plan. Could you tell us philosophically maybe what's changing on the local store basis that's making the effectiveness less or maybe what's changing what's making national more effective, especially when other companies might be pulling back from that to some extent? And also, what is the local spend going to be from '05 to '06? Do you drop out a point in '06 relative to '05 and shift that over to national? Or is the local spend going to remain the same '05 to '06?

I -- yes, I understand the question. I believe the wisdom in what we have done here is that we continue to put the same emphasis on local store marketing because it's critical. Pizza is a local business and we recognize that. And we would not want to do anything to diminish the importance of our local operators at the store level, doing the things in their neighborhoods and communities that they need to do to be successful. We also recognize though the power of national promotion and the efficiencies that you can create both on the electronic media side as well as the print media side by buying at the national level. So what we've done is we've shifted what I would call the middle investment. We've taken the co-op budget, which was the aggregation of a bunch of operators in a specific market, where to a large degree, they were going out and buying television anyway, but on average they were paying a 40% premium for the television because they were buying it on a spot market basis. We're taking those dollars and were rolling them up into the national level where we can gain those efficiencies in terms of our purchasing power. What that means to us is we're on TV more and we're on TV at a heavier weight, and it also provides us resources to do other things at the national level, consistent with our marketing plan and strategies. The same funding level will exist at the store level. Our average store is going to have somewhere in the neighborhood of 4 to 6% of their sales reserved for local store marketing activities and that will not change as a result of what we're doing with this shift from co-op to national.

So I do interpret it correctly then? So the co-op basically in '06 just goes away and that's all pulled up to national? Is that fair to think about it like that?

Yes, it doesn't go away because the co-ops will still have some funding for what will predominately be print activities. But what we've really done is shifted the majority of the co-op dollars that were being spent on television anyway into the national ad fund, which gives us a much bigger pencil in terms of our buying power. And it really doesn't diminish either the local store marketing or the co-op's ability to do some of their more market-related print activities. It's just a much smarter way to buy television and it's a much smarter way to buy national print.

Joe Buckley, Bear Stearns.

Thank you. I had a couple of follow-ups actually. Curious on the advertising weights in the first quarter. We know your national ad spend is going to be up about one-third this year. Was it up more than that in the first quarter?

We don't issue information about our specific ad weights, Joe. We think that that's probably information that we're better protecting the interest of our shareholders to not give that kind of specific data in terms of how we're planning our market calendar. Because obviously the more I tell you about what we've done, the more you can anticipate what we're going to do. I would just say that in the first quarter, as a result of the roll-up we did last year and the incremental money that we have in the national advertising fund, we were able to do more things, some of it at the television level, some of it with other marketing spend activities. We were able to do more year against year, which is exactly why we executed the roll-up in the first place.

Okay. And then David, you mentioned the category being so strong relative to the other QSR in seven of the last ten weeks. What do you attribute that to? Do you think it's a function of the economy -- the consumers falling down a little bit? Or the fading of the Atkin's low-carb diets have something to do with it? What do you think is behind it?

Yes, we've never -- we've said pretty consistently that we've never gotten too obsessed with the Atkin's low-carb diet thing. We didn't really feel that one way or another, although there may be some people out there who would suggest that that had something to do with it, that would not be my claim.

My claim would be that that middle band of consumer out there, kind of the target Domino's consumer, those families out there, those college students out there, those people that are buying pizza and buying it frequently, when you look at fuel prices and you look at kind of the situation right now in the mindset of the consumer, we believe that they are very, very value conscious. And they are looking for ways to feed their families and they're looking for ways to feed themselves that are high value. And so I haven't looked at all the macroeconomics because the numbers are still rolling in from the first quarter. But I bet you'll see some of the higher-priced fast, casual restaurants who were high flying here a couple of years ago -- I will bet you that some of those dollars are going back to the tried and true high-value concepts like Domino's, where you get a lot of food for the money, it's very convenient, you don't have to get in your car and drive anywhere or find a parking spot and burn gas. It's an opportunity for you to feed your family very efficiently. We think right now that we seem to be finding that sweet spot in the hearts and minds of customers and they're reacting and rewarding us with great sales.

Okay. And a question for Harry, just curious what you're anticipating in terms of the second quarter cheese cost comparisons year-over-year.

I think the good news is we're going to be rolling over pretty high numbers from last year. I think last year we were at $2 in the second quarter. Right now cheese prices over the last couple of weeks have probably been in the $1.45 to $1.50 range. So we're hoping that we'll see continued reductions from last year. It seems like this year, cheese prices have ranged somewhat in the $1.45 to $1.70 range, but have been a lot more consistent than they were last year when they were jumping all over the board. So we always say that's one thing we're not going to predict. We're just hoping that cheese prices have steadied out here at the $1.45, $1.50 level. you.

Steven Weiss (ph), Mindflow (ph) Capital Investment.

Congratulations on all of your fourth-quarter of a public trading company; I applaud your efforts. A couple of questions, David. What I noticed over last year or so, a lot of your competition had been putting in place strategic initiatives (indiscernible) helping reduce stores in cost, especially at the high cost of food prices rising daily. And in order to establish a better line of communication with their suppliers and open up better collaboration of supplies to reduce those costs. I'm interested in what you guys are doing or what you plan to do if you already haven't put into place an initiative yet on how you plan to open up a better line of communication with the suppliers, establish better collaboration, putting in touch some new sourcing initiative to reduce those costs in this very high-cost market.

Well, we're a Company that believes in continuous improvement, so I would never say that we are satisfied. But I would also just challenge the premise of your question a little bit, because the reality is we have purchasing and procurement initiatives every year built into our budget to continue to purchase more efficiently and to continue to engineer our products and our packaging in such a way that we're cutting costs out of our stores. And so when you've been doing this for 45 years as we have, and when you're the largest pizza delivery company in the world, whether you want to talk about cheese or packaging or topping ingredients or ovens or any aspect of what it takes to operate a Domino's Pizza store, we would compare our ability to buy efficiently and to buy at the lowest point on the rate card of anybody out there. And we'll continue to work on that with specific initiatives that we always have underway to both take product costs out of the system as well as labor costs. And some of the initiatives we've had with our new point-of-sale system, some of the new initiatives we've had with some of our new product architecture, we are experimenting in our stores all the time with new devices and appliances that allow us to do our jobs better and faster and eliminate labor. Those are ongoing initiatives and it's one of the things after 45 years we think we're pretty good at.

Have you guys been consolidating your vendor base? Is that how you're reducing your costs right now, whether it's in the (indiscernible) or collaborating better with your suppliers to reduce these costs and (indiscernible) competition?

Our philosophy has always been to take large positions with smaller numbers of vendors. We certainly do that in our key product and ingredient areas. We also vertically integrate whenever it's efficient for us to do so. As you know, we operate a significant distribution business that, one of the key services that we provide to our stores is that we actually manufacture the dough that is used; and that manufacturing process is one that continues to improve in terms of its speed and efficiency, which allows us to continue to be very, very competitive with the food baskets that we offer to our stores. So we think this is an area of strength and it's one of the reasons why we can be very competitive and aggressive with the kind of price points that we offer out there in our marketplace.

What's been your supplier feedback as into a lot of the new good initiatives you guys have implemented? Have they been really responsive?

We have outstanding relationships with our suppliers. In many cases, the relationships that we have span decades.

All right. Great. Again, congratulations on a strong quarter. I wish you continued success down the road.

Thank you very much.

Janice Meyer, CSFB.

Two questions. First, going back to the category comments, just given that McDonald's comps while still excellent have slowed materially. If you X'd out McDonald's, do you have a sense for how those category numbers would shape up?

That's a difficult question, Janice. I'm not sure that we are as prepared as we need to be to specifically address your question with everything that's going on in the burger business and other aspects of QSR. We watch pretty carefully our numbers and we watch pretty carefully the numbers of the people that we compete against. And we also get the Crest data very specific to pizza and pizza delivery. And it's our sense overall that there's a lot of momentum in pizza right now and that it's outpacing QSR. And when we look at kind of QSR across the board and it's just kind of the large nationally or publicly reported brands, look at the first quarter with the exception of Wendy's, it appears as though everybody is putting up pretty significant positive, steady growth numbers. So all of that feels like us to momentum across the sector and we like the fact that we're leading in terms of -- at least we believe that the pizza category right now is leading the way.

Right. A follow-up on the advertising. How do you think about returns on your advertising spending? Do you actually have some sort of formula that you look at to determine how successful it is? And you had certainly great results in the first quarter, but why commit so early in the year to increasing the spend for next year as opposed to watching your trends another few months? Did you have to do it now because of your buys for next year?

Yes. First of all, if I had an architecture that provided a very specific measurable, predictable ROI on advertising, I'd sell it for a gazillion dollars.

Well everybody's trying to find one.

Right. I think here at Domino's Pizza, we know it's working when we light up our computers every morning and see what last night's sales were. And our measurements are always how are we doing when we're on air versus when we're off air? How are we doing when we're on air with a national buy versus a local or a co-op buy? We do those correlations all the time to find out what kind of yield did we receive? And obviously we study very carefully what is the optimal number of weeks for us to be on television and what are the optimal levels of gross rating points we should run to effectively get our message out.

And so as we look at all of that, it's a path that leads us clearly to the point that national advertising is the most powerful engine for us. It drives the best results. And the more resources we can get in that area to efficiently use that leverage that we have to shout loud and strong out there in a very direct-response way that calls consumers to the telephone and gets an order into our stores, that works like crazy.

Why are we announcing this now or why did we do this rollout now? We're on the cusp of the upfront buy for 2006, so this is a time where we are thinking about how we want to buy and what we want to buy, television, print, and other things. It's not too early for us to be making these decisions. We engage the conversation among the system and our franchises. And without question, the momentum that we are building as a result of the strength of our national message and the efficiencies that we receive by spending it at the national level as opposed to the co-op level, made a 100% unanimous consensus decision of the system to move in this direction. And we are announcing it simply because we think it's a material aspect of our marketing philosophy going forward and we want our investors to know about it.

John Ivankoe, JPMorgan.

Thanks, again. Your comments on the overall segment were certainly enticing. Do you know how the pizza category fared on a traffic perspective relative to some other segments?

We don't get that information from a lot of the other players. We do know our information and we historically have not and will not engage in kind of public discussions about traffic versus ticket. But I will just make this comment and that is that from a standpoint of the extraordinary growth that we saw in the first quarter in same-store sales, a significant part of that was driven by traffic.

Significant meaning over half?

Yes. So we feel right now when I talk about momentum in the business, it's not only in sales, but it's in customer counts and activity in the stores.

Okay. Excellent. Secondly, on unit development, I know the unit development has gone up a little bit post IPO. Could you comment on how you feel about visibility of future new development across your system?

Sure. Our long-range guidance has been and continues to be on a net basis between 200 and 250 net new stores a year. As you saw in our press release, we opened 42 during this quarter and as you know, we tend to ramp up throughout the year, so the first quarter is usually our weakest quarter.

What we think is probably a more appropriate comment in terms of the store growth is the kind of rolling twelve-month activity. And you can see that we're pacing significantly above that 200 to 250 range. I don't think we want to adjust that range, but I do think it's fair to conclude that we seem to have more momentum right now than we've had in the recent past in terms of unit openings. We feel very comfortable telling you that we can operate at the high end of that range and it's certainly one of those ranges that we may be able to continue to better based on current momentum. But safely, if you assume that we're going to be at the high end of that 200 to 250 range, that's a number I'm very comfortable with based on our current rating (ph) pace of growth.

Is it also fair to say that your pipeline is above where it has been the last couple of years in terms of units that are expected to open? I assume your pipeline goes out a couple of years. Is that also, you commensurately size what was just on the last 12 months?

Yes, as you know, two-thirds of our growth comes in nationally, a third domestically, so there's great diversification in that growth. And we have a pretty good visibility in terms of where we have leases signed, where we have franchises who have been approved to go out and find real estate, and we do have indicators that give us a fair look into the future in terms of the amount of activity, both domestically and internationally. And again, we feel very, very good about our current position and we should not have difficulty of being comfortably within that range of 200 to 250. And if all goes well, maybe we can do a little better.

Great. Thanks, again.

Joe Buckley, Bear Stearns.

Thank you. Given your plans for '06 and your comments about the local, the co-o and the national, does the total ad contribution for franchisees go up or does it stay flat as a percent of sales?

Basically, the economic scenario for our franchises remains the same. So the reason that this is such a big win for the system is we're not cutting into unit economics and forcing any kind of an incremental marketing spend. Having said that, some of our operators may choose to put some incremental funding into their co-op funds. That's certainly something that they have the ability to vote and do. And likely, some will. But the fundamental philosophy of what we've done is to take a very inefficient buy out of that co-op level and move it into a very efficient buy at the national level.

Could you comment on what you're hearing about '06 in terms of upfront ad rates?

You know what, I think the game is about to begin, Joe. And I'm about as good at predicting that as I am cheese prices. So I probably don't want to engage in that other than we don't believe in the environment that we're in that we're going to experience any kind of crazy inflation increase like we saw a couple years ago as we were preparing for a year with Olympics and presidential election, etc. We believe that the inflation rate, to the extent that there is one, will be far more normalized. But beyond that, I think the auction is about to take place and we'll see what happens.

I can tell you that we are, as well as a number of other major players, constantly looking for other alternatives out there in terms of ways that we can get brand recognition and awareness above and beyond just buying television commercials.

Okay. And just another question for Harry. You mentioned commodities other than cheese. What's going on in the non-cheese commodity side of the business from a cost perspective?

The two things that we highlighted were the meats and the paper costs or box costs. Those are up probably more significantly than cheese for the quarter. I think the price of meats was up somewhere in the neighborhood of around 20 plus percent.

I'm sorry, the price of what, Harry?

The meats, the pepperoni and sausage would've been up in the 20% range and boxes were also up, not as high as that. When we look at the overall increase in food costs in our Company-owned stores, obviously, the cheese (indiscernible) apart from that (technical difficulty) up $0.20 and we'll call that close to a percent. But also, the meats and the boxes probably increase our overall cost probably 1 to 1.5% at the stores during the quarter. Some pretty dramatic increases.

I think the positive thing though was the fact that our Company-owned stores during the quarter was actually on a dollar basis up $2.2 million. So as Dave alluded to earlier, we have been seeing some nice improvements in our Company-owned stores, we still have a long way to go, but we are in the right path. And I think the other thing that was favorable is despite our food costs going up nearly 3%, we were able to basically keep our margins flat during the quarter. So we were able to leverage the sales in the areas of labor and other operating costs.

Okay, thank you.

(OPERATOR INSTRUCTIONS). John Ivankoe, JPMorgan.

I've officially set a record for questions. Hopefully this is okay. Some of your casual dining competition, if you very loosely use that word perhaps, for dinner, have talked about Midwest weakness. Are you seeing your conversely Midwest strengths in your markets? Is that something you care to talk about?

First of all, John, we appreciate your questions. And second of all, I just reviewed yesterday kind of our top 80 markets and how they performed up and through the first quarter and a little bit beyond. And what I can tell you is that one of the remarkable things about what's going on in our business right now is it really is across the board. It doesn't feel like it's one region over another or there are winners and losers in this. At least as relates to Domino's Pizza right now, we've got very, very strong geographic performance, whether you want to talk about the coasts or whether you want to talk about the Midwestern part of the country, we're seeing very, very strong and consistent results across the board. So from our perspective, we're not seeing any kind of a regional shift or something unusual. I think it's pretty much balanced.

Thanks, again.

At this time, there are no further questions.

I would just like to thank all of you for participating in our first-quarter call. We're very proud of our results and we're going to work very hard to hopefully have a very, very positive call at the end of our second quarter. So thank you very much.

This concludes today's Domino's Pizza first-quarter 2005 earnings conference call. You may now disconnect.