達美樂 (DPZ) 2006 Q2 法說會逐字稿

Good morning.

My name is Andrea and I'll be your conference operator today.

At this time I would like to welcome everyone to the 2006 second quarter earnings conference call, with your host Lynn Liddle, Executive Vice President of Communications and Investor Relations.

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).

Ms. Liddle, you may begin your conference.

Thanks, Andrea, and welcome everybody.

I am here with the two Davids, David Brandon who is our CEO, and David Mounts, who is our CFO, and you'll be hearing from both of them today.

We will spend just about an hour all up today talking about comments on the second quarter as well as an opportunity for you to ask questions.

Before we begin today, though I will refer you to the Safe Harbor statement that you'll see at the bottom of our news release, and I will also ask that the media be in a listen-only mode because this is a primarily investor-related call.

So with that I would like to turn it over to David Brandon, our Chief Executive Officer.

Thanks, Lynn, and good morning, everyone.

In recapping our second quarter of 2006 it was clearly a time of weaker than expected and I might add weaker than desired domestic sales for Domino's Pizza, and we are not happy about that and we are working very hard and, hopefully, very smart to turn that situation around in the second half of the year.

Clearly, we are looking forward to facing some comps that are much less challenging than we had in the first year as well.

During the second quarter of 2006 it was a time that highlighted the stability and resiliency of our business model because, truthfully, with top-line growth not being where we wanted it to be, we are still pretty proud of the results we were able to deliver.

If you focused specifically on our domestic sales, as anticipated we were comping over almost a 7% improvement in sales a year ago which we all knew was going to be a tough hurdle.

What we didn't know when we laid out the plan for the year is that we were going to be operating in a relatively difficult consumer environment and I am not going to talk a whole lot about gas prices and things that are happening out there relative to the economy, because those are things that we cannot control and our job is to figure out ways to overcome whatever those hurdles maybe and be successful.

So the most important factor that I want to talk about in the first half of the year has been that our new products and promotions have just simply not performed as well in national rollout mode this year as we experienced in our test market platforms that were staged back in 2005.

We believe that we understand at least most of the reasons why there has been a significant gap between what we experienced last year and what we experienced this year and we are fast at work addressing those issues as we kind of restage our marketing calendar for the second half of the year.

We continually remind you that the best way to look at this team and this brand and our performance is in a long-term sense, because we are proud of the consistent performer we have been in terms of growing our top line and our track record for consistent same-store sales growth.

In the second quarter which is the one we are covering today in the last five years, if you take the three major national competitors and you accumulate our performance, Domino's Pizza is plus 8%.

Papa John's is plus 4.3% and Pizza Hut is a negative 4%.

So again taking the longer-term view which we think is appropriate, we are very proud of the fact we figure out ways to stay positive and continue to outpace our competitors.

If you take that same approach to the last five years and look at it on an annual basis, our same-store sales are up 14% which compares favorably against our two national competitors, one of whom is up 4% and one who is essentially flat.

So while our first half marketing plan was not able to overcome some of the obstacles that we faced, we still have a lot of confidence in our ability to win the race over the long-term.

We have a very promising pipeline of recently tested promotions and products that we have lined up for the second half of the year and we believe they will resonate well for consumers in this environment.

Because we are the most consistent performer in our category and we are boastful about that, it is something that we feel is very important, we don't intend to lose that position in the quarters and the years ahead.

So I can promise you that this team led by me is very focused on getting momentum back in the second half of the year.

Now our same-store sales picture is very different for our international division, which was up 5.7% in the second quarter rolling over positive 7.8% comparison from a year ago, which is a very strong performance.

This quarter marked the 50th consecutive quarter, up positive same-store sales for our international division and we are very proud of that.

We attribute this success to a strong presence in many diverse markets as well as the relatively low risk, low investment master franchise model that we employ internationally.

Some of the highlights of the second quarter that I will just touch upon in our international business was the sale of the franchise rights and the corporate stores in the Netherlands, France and Belgium to our master franchisees from Australia who are exceptional and very, very strong operators, and we have a high level of confidence we will do a great job in those markets.

I also want to highlight the continued strength in the U.K. and Mexico due in part to a lot of the excitement that was generated as a result of the World Cup competition, and some of the marketing that we did to tie in with that activity.

Our emerging markets continue to grow and thrive, and we are continuing to invest in our international business where growth opportunities exist and we believe there are still many that are still yet to be pursued.

Now that I've talked a little bit about the top line, I would like to highlight a few points about the strength of our business model.

First with modest top-line sales improvements our business still can produce double-digit bottom line results.

And our primarily franchise system continues to produce steady and predictable cash flows which we continue to deploy to enhance shareholder value.

Now, here's some of the recent examples of ways that we have used our free cash flow that have benefited our shareholders.

We recently paid our quarterly dividend $0.12 a share on June 30th.

It remains one of the highest yields in our industry at approximately 2%.

It has increased twice since our July of 2004 IPO.

We paid out over $26 million in dividends last year and in February of this year we increased our annual dividend payout by 20% to $0.48 per share.

We have also executed two opportunistic and accretive share repurchases within the last four quarters, one with JPMorgan 4.4 million shares which added nearly $0.4 in EPS in 2005 and with Bain, 5.6 million shares expected to add $0.06 in full year 2006 EPS.

We have continued to work our balance sheet with shareholder interest in mind.

We have voluntarily prepaid our 2006 credit facility amortization which eliminates this requirement for the year.

We have paid down $45 million of debt year-to-date, but we also want to remind everyone that we are not afraid to lever off when the math works for us and, certainly, that has been a case.

An example of that is when we tacked on $100 million earlier this year to our senior credit facility to finance our first quarter Bain share repurchase.

We are very comfortable as most of you who have followed our story for any period of time know of operating our balance sheet at three times to five times leverage level and we will continue to do so to the benefit of our shareholders.

So you can see that despite our domestic sales shortfall in the quarter, we were still able to post a $0.39 EPS versus $0.34 last year using the financial levers available to us as well as taking advantage of the tax benefit from the sale of some of our European operations.

With that I would like to turn things over to David for a few minutes who can tell you a little bit more on how we got the results we achieved in the second quarter of 2006.

Thanks, Dave and good morning everyone.

As Dave mentioned the second quarter demonstrated the resiliency of our business model and how even with weaker sales we were able to post positive earnings.

Last year we reported nearly 7% increase in our domestic sales comps.

Despite these sales pressures, we posted solid bottom line results for the quarter so let's review what drove our net income growth and I will start off with the top line.

Our global retail sales increased 1.3% during the quarter and that was driven by our same-store sales growth in our international business and increased worldwide store counts of 312 units over the trailing four quarters.

Next same-store sales.

Domestically, our sales decreased 4.9% for the quarter.

Company-owned stores decreased 3.2% while franchise operations fell 5.2%.

They were rolling over at 6.6% in Q2 2005.

The softening sales environment has us very focused on variable cost management and while we did an okay job on this last quarter, we can and will flex our spending according to our sales trends.

As for international same-store sales, they increased 5.7% rolling over an impressive 7.8% in Q2 2005.

We make a point of reminding you in each of these calls about how we look at sales comps at Domino's.

There will be quarterly swings but we run the business with an annual mindset.

We are focused on the long-term and our long-term plan has demonstrated that performs for shareholders.

Also driving global retail sales were our worldwide store counts.

We added 66 net new stores to our portfolio during the quarter and again over the trailing four quarters we added 312 units.

Leading the way was our international group with 238 of these net openings over the last four quarters.

On our income statement our total revenues were $327.7 million.

This was a $19 million decrease or by 5.5%less than a year ago.

It was driven by the lower volumes in our distribution business which were related to the lower domestic sales.

Additionally the lower cheese prices accounted for a $10.4 million decrease in revenues.

The average cheese block price in the second quarter was $1.17 per pound versus $1.51 last year.

This is a nearly 23% decrease.

This helped our team USA margins but it lowered our distribution business revenues.

We continue to believe that our global retail sales which increased 1.3% versus the prior year are the best gauge of our top-line performance.

We saw this again in the second quarter.

The lower cheese prices decreased year-over-year revenue by $10.4 million.

However cheese and other price changes did not affect our global retail sales.

Next I'll talk about bottom line.

As I said earlier we were $0.39 per diluted share in the quarter.

This is nearly a 15% increase from year ago levels.

Strong performance on our international business, lower food prices, primarily cheese, which positively impacted companies for margins and a tax benefit of $2.9 million related to the sale of certain international operations which I will give more details on in a moment, were the factors.

Additionally, we have benefited from share repurchases over the past year as Dave outlined in his comments.

We lowered our weighted average share count 63.3 million shares from 67.6 million shares in Q2 2005.

As for the tax benefit I just mentioned, on May 1, 2006 we signed a stock purchase agreement to sell our company-owned operations in France and the Netherlands.

We sold this business to our very qualified and highly successful master franchisee group in Australia and New Zealand.

The sale closed subsequent to the second quarter on July 3rd, but prior to reporting.

During the second quarter we recognized a tax benefit of approximately $2.9 million from the realization of deferred tax assets relating to these operations.

We will account for the remainder of the transaction during the third quarter but we do not expect it to have any material impact on our earnings.

One last item related to taxes.

In Q2 of 2005 I'll remind you that we had a $1.1 million tax benefit in those numbers and that had an effect on our EPS as well.

To sum up, when you disregard the tax items mentioned above our diluted EPS was fairly steady, or slightly better year-over-year.

We are pleased with this result given the fact that top-line domestic sales were weaker than last year.

Next I will move on to leverage.

Our total debt was $789 million, a $51 million increase from the end of the year.

It was the result of additional borrowings of $100 million that along with $45 million from cash -- from operations was used to fund the Banks share repurchase in Q1.

It was offset by $45 million of voluntary prepayments of our term loan in the first half of the year.

Our effective rate went from 5.3% in Q2 2005 to 6.4% this year.

This is due mostly to the rising market interest rates.

Interest expense was $2.3 million higher at $12.9 million for the quarter.

Our total leverage ratio stood at 3.2 times EBITDA up slightly from the 2005 year-end of 3.1.

On CapEx we incurred approximately $9.4 million of capital expenditures during the first two quarters.

This is down from the $15.2 million we spent in the year ago periods which included a $7 million expenditure on our world resource center refurbishments that we completed in 2005.

The last item I would like to mention is that despite our challenging quarter, we continue to generate significant free cash flow, which we defined as cash flow from operations less capital expenditures.

Free cash flow for the first half of '06 was $44.5 million versus $43.7 million last year.

In the first half of 2006 we have produced a free cash flow yield of 6.6% versus 6.1% for the same periods last year.

This is at the top of our industry.

This metric is sensitive to changes in revenues so we also look at it in terms of dollars of free cash flow per share.

We were $0.694 in the first half of '06 compared with $0.652 a share in 2005 or up 6.4%.

Our priorities are very clear in that we focus on using cash flow for reinvesting in the business, paying a significant dividend and then seek to reduce our most expensive form of financing.

Generally this means non flowed equity if it is available for sale and whichever debt is most economical.

To further prove my point, since our IPO in July 2004 we used cash from operations to repay approximately $170 million of net debt, approximately $220 million was used to repurchase shares, and we have paid dividends totaling over $45 million.

Again, as I mentioned earlier, we are in the business of putting dollars into shareholder hands and our business delivers steady, even steady cash flows even in soft or weaker market environments and we believe that this is why our business model is less risky than many of our industry peers.

This concludes our financial update.

Once again I want to thank you for your time today.

And with that, Dave and I would like to answer questions.

(OPERATOR INSTRUCTIONS).

Mark Kalinowski, Buckingham.

I just wonder if I could get some more color on the marketing spending that was done in the first half of the year, plans for marketing spending in the second half of the year, how they relate to one another?

Thank you.

Mark, we have a pretty balanced calendar for the year.

We didn't put, and I think we made that point really clear, despite the fact that we were going up against some pretty tough comps, we don't see this as a race to necessarily beat one quarter at the expense of subsequent quarters.

So our marketing spend for the year is balanced across our marketing calendar.

We didn't have anything particularly unusual we were doing in the first half and we have plenty of bullets to fire in the second half.

So we won't get into specific GRPs and what our plans are and how much media weight we're going to be out there with because obviously that is proprietary and we are not going to release that information to our competitors or anybody else.

But I would just tell you that we are well positioned to have plenty of marketing dollars in our arsenal to do what we think we need to do to be successful in the second half.

Jeffrey Bernstein, Lehman Brothers.

I had a couple of questions.

Just first in terms of your thoughts on the current Bain stock holdings.

Obviously, you benefited this quarter from your late first quarter buyback.

It seems like their ownership is now down below 30%.

And just wondering how is that amount determined in terms of repurchase and what your thoughts are on further repurchase.

I'm just thinking if it's difficult to buyback from Bain in particular whether or not you guys would consider going out into more of the open market to do some share repurchase?

And then I had a follow up.

Our practice on share repurchase and at least to this point, excuse me, is the notion that increasing the flow is a good thing and to the extent we have willing sellers at price levels that we feel are attractive.

We obviously have a balance sheet that provides us a lot of flexibility, taking advantage of those opportunities.

So I can't speak on behalf of Bain.

They are happy shareholders who love this business and know better than anyone the upside that continues to remain.

But having said that, when they are at a point for whatever their reasons may be they would be interested in selling more shares, that is certainly a conversation that we are anxious to have.

And we do not have any plans in the near-term to go out and buyback shares from the open the flow.

We would rather use those opportunities to create more flow.

And then just a question on the broader consumer category.

I know you guys talked last quarter about doing some internal research.

Without disclosing any confidential information, just wondering if you could talk about the category versus your QSR peers in other segments.

It seems like the pizza category is being compared more to the casual dining segment with the higher average check, rather than being compared to more the quick service segment.

I'm just wondering how your thoughts as it relates to consumer spending pressures, the focus on value versus premium.

Thanks.

There is clearly a lot of changes that are occurring out there in the marketplace.

It seems like there always are.

And fuel prices make a difference.

It is affecting, I am sure, the way consumers are behaving.

There seems to be some things happening between QSR and casual dining.

There is some evidence that dinner occasions right now has been the one that has kind of been hurt the most in the first half of the year, but there is as many theories out there as there are people that's answering them.

So here at Domino's we see our job as a rising above whatever those economic issues may be and whatever those economic theories may be and our job is to maximize our potential as the leader in the pizza delivery category.

And we didn't do a great job of that in the second quarter.

We are prepared to do a better job of that in the second half of the year and, frankly, from my perspective that is what is most important.

If I could just, one more question in terms of the international front, obviously results remain very strong.

Just seems as if unit growth outside U.S. represents the greatest opportunity and looking at your largest markets, I know you guys post that slide periodically, being at about 50% saturation.

Just wondering how you determine the potential saturation in those markets and, separately, if you have completed a similar saturation analysis in the U.S., if you could give some details on that?

Thanks.

Sure.

Saturation for a lot of the brands and companies in this business is almost a theoretical because they're wrestling with traffic patterns and how many stores we can put in a particular area.

We really don't have as much, by guess and by golly, in that analysis as most other concepts because it is geographical.

We have a drive time from where the store is located.

We have households within that delivery and service area and we know what it takes to flip credit market and adequately cover it.

We know the areas that are commercially appealing based on the density of households and we know the areas that are not commercially viable because of the lack of households.

So when we share with you our projections, either domestically or international by market, for what a buildout market looks like, we have kind of taken out the maps, looked at the household penetration levels, and really concluded what we need to look like to adequately cover the geography in the market.

And here domestically, we still have several hundred stores to build and where -- we are expending significant amounts of money for national advertising to create a buzz around our brand and create consumer demand and those consumers cannot in fact access the brand because we don't have distribution.

So until those several hundred of stores are built, we are still on a campaign to continue to grow our net store count here in the U.S. at the same time we continue to take advantage of the growth opportunities in international markets.

Can I jump in with one last quick question?

Sure.

Just on the tax rate, obviously, it was beneficial this quarter, and I said the transaction really closed in early July and there will be minimal impact.

Is it safe to assume then that the tax rate for the back half of the year would be more normalized from [low] to the first quarter I guess, more the 38% range or might you see further benefit in the third quarter?

What I would do, Jeff, I think the tax rate you want to be thinking about, absent the France, Netherlands transaction is probably more like a 37% rate for the year.

There will be some small fluctuations due to different state opportunities that we will take advantage of and just managing the tax dollar, which is what we are supposed to do, but that is the rate that I would use.

Joe Buckley, Bear Stearns.

I want to ask a few questions about the advertising plans and what you've done so far this year as well.

I think you shared with us in the first quarter that initial ad spend was relatively flat.

Could you give us an update on what you did in the second quarter just to help us gauge how many bullets you have for the second half of the year?

Yes.

I would love to be more specific with you than I really should because we view this as very, very proprietary in terms of what our advertising spend has been and is going to be, but it has been generally speaking in the first half of the year it is the same story that we talked about in the first quarter.

It has been relatively flat.

Relatively flat to slightly positive, but slightly positive doesn't mean that we have less bullets to fire in the second half because truthfully we are buying some media more efficiently and we have got more dollars in our national advertising fund spent.

So the net-net of it is that we feel we are very well positioned.

We haven't disproportionately spent marketing dollars in the first half of the year, chasing anything fictitious numbers and we have got a calendar set up in the second half of year that is very strong and will be very competitive with where we were year ago.

The nice thing about the second half of year is the comp scenario is going to be far more reasonable than what we have been dealing with in the most recent six months.

You mentioned in talking about the second half, I think you used the phrase, restaged some of the marketing and pipeline and more recently tested products.

Without getting into details, because I know you won't, can you talk about sort of conceptually what you were trying to achieve, how you're trying to -- if you were trying to reposition yourselves a little bit for the second half, sort of what the goals were?

Sure Joe.

And I will walk a fine line here but I want to be as forthcoming as I can because I know the intent of the question.

We are very proud of the fact that we follow a very disciplined protocol here in terms of what we roll out as our national promotional topics.

We don't do anything that we don't thoroughly test and we are pretty proud of our test protocol, because in the recent years we have done a really good job of having very, very low variables between what we have experienced in our test platform and what happens when we actually roll something out nationally.

But what I will share with you is that we thoroughly tested it in 2005 and had very strong results from the test promotion or from the promotional topics that we rolled out, that we rolled out thus far in 2006, and we saw a much greater variance in terms of what we experienced in the national rollout than what we saw in the test platforms a year ago.

And it was a negative variance.

And that has been problematic.

And we have gone back and we believe that we have determined some of the factors in terms of the changing attitudes of the consumer and the changing economy out there but also some of the things that have changed within our category and generally within the sector.

We think we are a little smarter now and we have actually gone out and tested some things during the first half of this year that we think give us a much better read and that will be more projectionable in terms of what we should experience in the second half.

So I have a lot more confidence knowing that we're going to be rolling out things in the second half of the year that we have got a very recent test experience with because clearly things have changed from when we tested some of our first half promotions back in 2005.

That's helpful.

Thank you.

John Ivankoe, JPMorgan.

A few, if I may.

First, David, I think -- or David Mounts, in your prepared comments, I think you said that France and Netherlands being sold would not materially impact earnings?

Yes, that's correct.

The effect for the second half of the year will be about a negative 600K, but it is not, as you can tell by that amount, not a material amount.

We have not given a long-range forecast but ultimately we wouldn't be doing this transaction unless we thought over the long run we were going to end up with better earnings.

And we believe with the strength of the Australia franchisee and what they are bringing to the table in this effort that over the long run we will be better off.

Are there any other markets that you own or plan to invest in internationally?

Well, as you know John, we are always evaluating all of our international markets.

The reality is that we are always ready to invest when it makes sense to invest.

Sometimes, we make markets internationally, and when we have performance, this was certainly the case in France and Netherlands, that we thought the performance could be improved upon.

We chose to run those operations for a while and then basically we have refranchised them now to one of our very competent and capable international franchisees.

It gives them an opportunity to grow.

It keeps them focused on Domino's Pizza and we think in the end gives us better results.

We are always doing that.

We are always evaluating, certainly looking across both oceans, at opportunities.

And that is an ongoing process that Mike Lawton and his team are focused on.

Is there any change on, I know that CapEx guidance for sometime has been $20 to $30 million.

Do you think we will be within the range or higher or lower for 2007?

Well, clearly we are tracking, you know.

I think I said in the first quarter that we would be probably up right in the sweet spot of that range.

We are tracking slightly below that right now.

We have been looking at all CapEx with a pretty critical eye, given where our domestic sales numbers are, just like we are looking at costs and variable costs and running the business in an appropriate way, to match up to those sales numbers.

So right now I think we are a little bit ahead of that target.

Okay.

I mean the leverage goal, and I know you stated this, if not just in the first quarter over the past couple of years has been between three and a five times, and you'll end the year 2006, I think, at three times or under.

Given the covenants that you have on the debt that is outstanding now, can you walk us through mechanically how you would accomplish significantly more leverage onto your model and what that actually might mean to the Company's ability to repurchase shares?

This may sound a little pedantic, but I will try to walk you through the sequence.

To me, the first event that has to happen is I have to have a willing seller.

And that is the triggering event that causes anything to happen and right now I don't have that.

Obviously, if we were to come into a situation where Bain were to decide, for example, that they were willing to sell a portion or even all of their shares, the first thing that we would need to do is look at financing to increase our share repurchase capabilities.

We are currently restricted mainly by our bonds, but also there are some bank covenants as well that prevent us from doing (technical difficulty) size of repurchase that we have done historically or the amounts that we would like to do if they became available.

So we have to go through and do that.

The good news is that the receptivity from debt capital markets has been extremely high.

When we did the tack-on, which was a no fee deal, it was oversubscribed a couple of times, you know, which doesn't always happen on no fee deals, and that is always a good sign.

And we continue to receive favorable remarks from those in debt capital markets, and I think that that would not be a problem.

But that would then enable us to do a repurchase.

We'd probably do something similar to what we did in the past in terms of a private transaction.

I'd certainly like to get that at a discount.

I've been able to get the last two at a slight discount.

That is always like pulling teeth, John.

But we would do our best there, and that is a quick overview.

Thanks, very much.

[Ursula Mohren], Bear Stearns.

I am actually Bear Stearns Asset Management.

I am curious what your domestic franchisees are telling you about the business and what needs to happen to move the comp a little bit more positive or whether that is a topic that you pursue with them?

Well, we are constantly interacting with our franchise partners.

We have about 1320 of them which means we have about 1320 opinions as to what they would do if it was their decision to make in terms of promotional topics and pricing strategies.

In our job as a franchisor and the leader of the system and, oh, by the way, with our nearly 600 stores we are also the largest franchisor of this concept, our job is to lead.

And so rather than trying to please all the people in terms of addressing everybody's own individual opinion, we try to make decisions that our best for the system based on what we are seeing happening across a host of markets from coast-to-coast.

And we try to take measure of what the consumer is buying and how the category is performing.

We look at our competitors who are failing and we try to learn from those mistakes, and we look at our competitors who are doing better, and we try to learn what we can learn from that.

And so we are in a mode right now where we put together a game plan for the second half, and our franchisees are also operators and one of the things that we are constantly reminding them of is that this isn't just a business of what you put on TV or what the marketing strategy is.

It is also a business about local store marketing, and it is also a business about providing great operations and great products and services.

So the good thing about a period of time like this when sales are a little bit harder to come by and we are comping up against tough numbers is it becomes a bit of a rallying cry, because we all know that we have got to get a little bit sharper.

We have got to provide better service.

We have got to take care of our customers because there aren't as many of them as we would like to have.

We have got to work really hard in our local communities to make sure that we are connected and maximizing opportunity.

So in a convoluted way, I must tell you that periods of time like this make us sharper and better, and it motivates the franchise system to go out there and get something done, and we're pleased about that.

(OPERATOR INSTRUCTIONS).

Joe Buckley, Bear Stearns.

Just curious going back to the category type questions, in my perception of the home delivery pizza segment is that it should be among the most defensive, and yet looking at the numbers from yourselves, as well as Pizza Hut, and I guess Papa John is doing a little bit better, it looks anything but defensive in the short run.

Just kind of curious your thoughts and perceptions on whether my initial assessment was correct to start saying what may be different this go-around?

Well, you know we have nearly 46 years of experience to draw upon, Joe, and generally speaking it is a very defensive.

It is a wonderful category in terms of providing value.

I don't think you have to retain an MBA class to learn very quickly that if you can feed a family of five for $35 and have food left over in an economic environment like the one we're going through, it is a very convenient and very value-oriented way to feed a family, and that hasn't changed at all.

Now, I do believe there is a lot of stir out there right now.

I think the consumer has gone through a re-evaluation of where and how they spend their money and the fuel price issue is a significant one.

That is all out there.

But I would tell you, and I would like to compliment our competitors over at Papa John's.

I mean they don't seem to be worrying about the economy right now.

They are doing just fine.

And so they figured out a way to persevere in this environment and they are in the pizza delivery business.

Frankly, Pizza Hut has got their own issues and they probably got their own reasons for why they are not doing well and I doubt that they're trying to turn that into economic theory.

I bet you they will be the first one to stand up and tell you that they are making some mistakes and there are some things that aren't working as well as they need to.

And that is where I am right now.

This is an organization of winners.

We had very few negative quarters in the last eight years.

And we don't like it.

And we see it as our responsibility to fix it.

And we're not only winners in terms of our own sense of pride and competitive self, but we also are highly incentivized to drive phenomenal results.

We are owners of this Company and we have significant upside for us to continue to maximize the opportunities associated with the brand and the Company and that is what we are doing.

So we are not worried about the category.

We are not worried that the consumer has gone away and is never coming back.

We are not listening to a lot of the theories and guessing that's going on out there as to why certain things are happening.

We are going to get reconnected with the customers we need to get connected with and get the traffic levels up in our store to the point where we can get back into the positive sales mode, drive strong unit economics, keep building stores, and keep making money.

And that is what it is all about.

I would just add too that if you look at the last two quarters, which it is very rare that we would have two sequential down domestic sales quarters, it just doesn't happen that often, and look at our earnings performance kind of despite that.

You look at those results.

I am not sure that you're off target in terms of defensive.

I view the business model as being extremely resilient and much lower risk than many other concepts.

I understand.

I was asking where the sales defensiveness is in the business model.

But thank you.

Appreciate the comments.

At this time I would like to turn the call over to Mr. Brandon.

I think my response to Joe's question is probably the best way to finish this call.

We don't like reporting negative sales.

We are not making excuses about comp hurdles.

We are not making excuses about economic change and churn.

No excuses.

We are winners.

We are incentivized to win and that is our plan.

We have got big goals for this year.

We're excited about our plans for the second half of the year, and we are working really hard and hopefully very smart to get some momentum back on the top line and make the second half of the year very special and make up for some of the ground that we have lost in the first half.

So that is what we're going to go do.

We appreciate your involvement in this call, and we look forward to reporting to you our third quarter results, hopefully, with a lot more momentum and a lot more to talk about in terms of some of the things that are being accomplished on the top line.

Thank you.

Ladies and gentlemen, thank you for participating in today's 2006 second quarter earnings conference call.

You may now disconnect.