達美樂 (DPZ) 2008 Q4 法說會逐字稿

Good morning, my name is Amber, and I will be your conference operator today.

At this time, I would like to welcome everyone to the 2008 fourth quarter and year end 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).

At this time, I would like to turn the call over to Lynn Liddle, Executive Vice President of Communications and Investor Relations.

Thank you.

Ms.

Liddle, you may begin your conference.

Thank you Amber.

Welcome everyone to our fourth quarter and year-end 2008 earnings conference call.

As Amber outlined, we are going to open today with comments from our Chief Financial Officer, Wendy Beck, followed by comments from our Chief Executive Officer David Brandon.

We will be commenting a little bit on the 2009 outlook today, so I will refer to you our Safe Harbor statement, which is in the 8-K and the 10-K for to you look at.

And I will also ask that the media be in a listen-only mode this morning.

To start out this morning, I would like to introduce Wendy Beck, our Chief Financial Officer.

Thanks, Lynn.

Good morning everyone.

As you will note from our filings this morning, we once again experienced challenges this quarter in our domestic environment, while continuing our strong growth trend in our International division.

Let's start with the top line, we ask to you remember that revenues alone do not necessarily give you the complete picture of our top line growth, and instead consider global retail sales as a clearer gauge of overall sales and store growth performance.

Our global retail sales increased 2.7% during the fourth quarter on a constant dollar basis.

This was driven primarily by same-store sales growth in our International business, and an increase in worldwide store counts of 47 net units during the fourth quarter, and 149 net units over year end 2007.

Our International division has grown to comprise over 40% of our global retail sales.

Looking at same-store sales.

Domestically our same-store sales decreased 3% for the quarter, versus the fourth quarter of 2007.

Company-owned stores decreased 2.2%, while franchise same-store sales decreased 3.1%.

International same-store sales increased 4.5%, marking the 60th consecutive quarter, or 15 years of International same-store sales growth.

As a result, our total revenues for the fourth quarter were $428.2 million, a 17.8 million, or 4% decrease from prior year, breaking down the decrease, our company-owned store revenues declined $15.1 million, or 12.9%, the majority of which was due to $13.5 million reduction of revenues from the store divestitures in the quarter, with the remainder of the decrease attributable to lower same-store sales.

Domestic franchise revenues declined approximately $600,000, or 1.2%, primarily due to lower same-store sales.

International revenues declined $2.3 million, or 5.2%, due to the negative impact from foreign currency translation.

As mentioned on our third-quarter call, we anticipated a negative impact from foreign currency translation in the fourth quarter.

This did negatively impact our royalty revenues by approximately $3.6 million in the fourth quarter, and $1.9 million year-to-date.

It also impacted our International supply chain revenues by $3.5 million in the fourth quarter, with minimal impact year-to-date.

This decline in International revenues was offset in part by higher same-store sales and increased store count.

Domestic supply chain revenues were essentially flat in the fourth quarter.

Lower supply chain volumes and a decrease in cheese prices, were partially offset by increases in non-cheese commodities during the fourth quarter.

However, there was an approximate three-week lag, between the change in the block price of cheese and the pricing to the stores.

Therefore we will see more of a benefit in 2009 from the recent reductions in the price of cheese.

Moving on to our operating margin, our consolidated operating margin as a percentage of revenues increased 0.3% in the fourth quarter, versus the prior year period.

As a reminder, we define operating margins as revenues less cost of sales.

There were essentially two main operating margin variances.

First our supply chain margin increased 1.4% from the prior year quarter, which resulted in a 1% increase on our consolidated operating margin.

As discussed on the fourth-quarter call last year, the increase in the price of wheat negatively impacted our supply chain margins in 2007, as pricing increases were not passed on until 2008.

As a result of this, the supply chain percent margin versus 2007 was positively impacted in the fourth quarter by 0.8 of a percent.

Additionally a decrease in cheese prices also had a positive impact on the percent margin.

Cheese prices are a pass-through commodity cost, and therefore do not impact dollar margins, but do have an impact on percent margin.

The average cheese block price in the fourth quarter was $1.79 per pound, versus $2.01 last year, for a 10.9% decrease.

Additionally, the supply chain percent margin benefited from reduced delivery frequency.

Higher non-cheese commodities such as meat, chicken and boxes, and lower volumes, offset the margin increases.

Second, our company-owned store operating margin declined 2.3% from the prior year period, which resulted in a 0.6% decline on our consolidated operating margins.

Food and delivery costs accounted for a majority of the decline.

Food costs as percent of revenues were higher, because of non-cheese commodity costs, and a lower average ticket.

Partly due to our new sandwich platforms, and also more aggressive pricing.

We are happy to accept the lower average ticket in return for the increased traffic we have received from our oven-baked sandwiches, and other traffic-building initiatives.

We have seen a recent softening in both cheese and fuel costs, and we will see more of the benefit of this on our company-owned store margins going forward.

Now turning to our G&A expenses.

G&A increased $1 million, or 1.8%, in the quarter versus the prior year.

There were two items that affected comparability to the prior quarter, a $1.8 million increase resulting from a gain recognized in 2007 on the sale of a corporate aircraft, offset in part by $1.3 million of non-recurring gains, related to the sale of 23 stores, primarily in Washington and California.

Including the 22 stores sold during the fourth quarter, we have now sold 82 stores year-to-date.

The details of these two items are also outlined in the items affecting comparability table in the earnings release.

Excluding these items that affected comparability, G&A increased 0.5 million versus the prior year quarter, due primarily to a $2.5 million increase in bad debt expense in the fourth quarter.

While we did experience higher than historical levels of bad debt expense in '08, the Company continued to collect over 99% of domestic franchise royalty and domestic supply chain receivables in fiscal 2008.

We collected nearly 100% of our International royalty and supply chain receivables.

Additionally given the two years of salary freezes and no bonus payments, Dave graciously requested that the Board approve an additional paycheck for all eligible team members, excluding himself, that was paid in the fourth quarter.

As a result this impacted G&A expense in the quarter by approximately $1.8 million.

Offsetting these increases in the quarter were lower advertising, depreciation and amortization expenses, due to the store divestitures.

Now let's look at our leverage.

We have 1.7 billion in total debt, and given the uncertainty of today's debt markets, we are very pleased to have our debt facility in place, with a blended fixed cash interest rate of 6.06% through 2012, with two possible one-year extensions.

As for our tax rate, our effective tax rate was 31.8% in the fourth quarter, and 34.9% year-to-date, as we continue to have tax reserve reversals.

However, as previously indicated, we currently anticipate approximately a 40% normalized rate in the foreseeable future.

Now let's look at bottom line earnings.

Our fourth quarter diluted EPS as reported on a GAAP basis was $0.19, and remained at $0.19, when adjusted for items affecting comparability.

The $0.19 as adjusted EPS figure is a $0.02 decrease, from the $0.21 in 2007.

Our operating results negatively impacted us by $0.04 for the quarter, including the negative impact of foreign currency.

Our EPS benefited $0.01 from the lower share count, primarily due to our share repurchases, and also benefited $0.01 from the tax reserve reversals in the quarter versus 2007.

As stated in our earnings release we have repurchased 136,600 shares of our common stock, under the share repurchase program for 1.8 million during the quarter.

Additionally, on a year-to-date basis, we have returned 42.9 million to our shareholders, and 97.3 million life-to-date under our share repurchase program.

We have now completed 49% of our repurchase authorization.

During the fourth quarter, we purposely built our cash reserves during these unprecedented economic times.

Let's look at our liquidity, as of the fourth quarter, we had $45.4 million of unrestricted cash.

We believe that our current unrestricted cash balance, and our expected ongoing free cash flow generation, are more than sufficient to fund our operations for the foreseeable future.

In addition, we had total borrowings available under the revolver of $60 million, of which $37 million was committed under letters of credit, resulting in $23 million readily available for borrowings, and we had no borrowings under the revolver.

The Company has historically not needed or used the revolver for working capital requirements.

In closing, 2008 was a year filled with many challenges, that negatively impacted our operating results, however, despite a challenging year, we continue to generate positive free cash flow.

$55.8 million for fiscal 2008, or over $1 million per week, which highlights our continued ability to generate cash.

We are very pleased with the continued growth in our International division.

We boast strong sales and store growth.

We have a proven business model that is resilient, even during these challenging times.

In addition, we are taking actions, to ensure we are well-positioned for growth when the domestic environment stabilizes.

This concludes our financial update.

I would now like to turn it over to Dave.

Thanks, Wendy.

Good morning, everyone.

I am going to try to make my opening remarks as brief as possible to allow time for questions.

Clearly there is a lot happening in our economy, and in our industry, and certainly here at Domino's Pizza.

2008 can best be described as a rebuilding year at our Company.

We continued to benefit from the growth and success being achieved by our International division, however, our domestic business was plagued with continued softness in traffic and sales, while at the same time being hit with unprecedented cost increases, in virtually every area of our business.

Now we teams kind of go in the bunker when adversity strikes, and they wait and hope for things to change.

My belief is that great teams respond to adversity and difficulties with energy and purpose, and they do what needs to be done to fix their problems.

I lead a great team here at Domino's, and I am convinced that we are doing all of the necessary things to get our domestic business growing, and going again.

These initiatives that we have been working on for the past 18 months, are starting to produce the results that we were expecting, and we are excited about that.

In 2008, the financial markets imploded, and we went from being a Company that was being rewarded for our progressive and creative approach to managing and maximizing our capital structure, to a company that was regularly being questioned about whether we were overleveraged.

We continue to believe that our capital structure is not only appropriate for our business model, but it is optimal, given the current situation in the capital markets generally.

The more investors understand about our business model and the flexibility of our current debt structure, the more they recognize the significant upside in our Company as a long-term investment.

We have struggled in our domestic business for the past couple of years, as have many in our industry, and it has been a short-term negative impact on our growth and success as a company.

However, the good news is that we continued to produce significant free cash flow, as Wendy covered with you, during this entire period.

And we have really demonstrated the resiliency of our business, during what we consider to have been the worst of times.

However, what is more important to focus on are the changes that we have made to make our business stronger, and make our business better for the longer term.

And they include a number of different aggressive initiatives that we have under taken.

As you all know, we have changed our advertising agencies early last year, and in fact have continued to develop a stronger and better partnership with Crispin Porter and Boguski.

We are extremely pleased with our new talented Chief Marketing Officer, Russell Wiener.

Prior to joining us he headed up marketing for the Pepsi brand at Pepsico, and he is a talented executive, and is making a significance difference in our business already.

We have launched two very important product platforms, oven-baked sandwiches, and our new Domino's American Legends pizzas, and we are excited about both of those new product platforms, and the results that we are achieving.

We are attacking new day parts.

We now have all of our stores open at the lunch hour, and we are working very hard to be a bigger player in the late-night business, particularly with some of our new products.

We have gone to a lot of work to strengthen our existing franchise system.

Thus far, we have either removed or upgraded approximately 125 of the F-rated franchisees that we started with a year ago when this initiative began, and there are more to come.

We also balance that with recruiting new franchisees.

We brought in 93 new franchisees in 2008 alone, and that process continues.

I am extremely pleased with the leadership that is being provided with Asi Sheikh, our new Executive Vice President of Team USA.

Asi has conducted a major house cleaning of market based leadership and tuned Team USA.

He has reconstituted a team that is generating significant improvements in their results, and I have high expectations and confidence in what Team USA can achieve.

We are fixing our share of voice weakness than we have discussed in the past, by adding to our marketing spend through shifting more dollars back into national marketing, and we have also developed some strong relationships with strategic partners, that have in fact added to the resources we have available for our national television spend.

We are undertaking new pricing initiatives to make better pricing decisions at both the market and the store level, and we are already starting to see benefits from that initiative.

We have implemented a stronger store audit program, with a full dedicated auditing team, which will force a higher level of operational accountability across all of our domestic stores.

And we know this is going to give us terrific advantages in the months and years ahead.

We also will be launching a new franchise recertification process, which we call a high performance franchisee training and development program, that is going to reach 99% or more of our domestic franchise base in 2009.

We are putting a tremendous amount of emphasis to making sure we have the right franchisees, and they are trained and ready to go out and execute in the environment in which we work.

We have implemented a number of cost efficiency programs in both the purchasing side of our business, as well as the execution and operational side of our supply chain division, and we have a number of other exciting initiatives that I am not prepared to discuss publicly yet, but you will be hearing more about as the year unfolds.

Now based on the uncertain economic times in which we live, and the times in which we are operating our business, I want to share with you everything I possibly can regarding what we know and believe about 2009.

Doing a budget forecast for 2009 was more difficult than any time I can remember.

Anyone who claims to know what is going to happen in the domestic economy in 2009 is someone to avoid.

However, our approach in preparing our 2009 was simply this, to prepare for the worst, and hope for the best.

We have never given earnings guidance on a quarterly or annual basis, and we are not going to start now.

Instead, however, we have always given what we characterize as long-range expectations for our business, which many of you have heard multiple times, but for those of you who haven't, they always have been to grow our domestic same-store sales between 1 and 3%, to grow our International same-store sales between 3 and 5%, and to have net store growth across the global system of between 200 and 250 stores.

As we built the plan for 2009, given the economic uncertainty, and the conservative approach that I have already discussed, we have made the following assumptions.

We assume that we will have a flat, domestic same-store sales picture for the year.

We are assuming that as it relates to the global economy, that the range of positive same-store sales we will achieve in our International business is between 2 and 4%.

And we are assuming that we will have net store growth this year of between 175 and 225 stores.

Additionally, we are assuming that the lower commodity costs we are currently enjoying will continue to benefit us throughout the year.

We are assuming that Team USA will have a much stronger year of EBITDA production.

We assume that the negative impact on foreign exchange will negate most of the gains that we will generate in our International business.

And we assume that we will have another year of CapEx spending, that will be at the low end of our stated annual range of between 20 million and $30 million.

We have put a larger contingency in our budget plan than ever before, to reflect the uncertainty and difficulties that we may encounter as a result of the current economic environment.

Now it is way too early in the year to even comment on the kind of EBITDA production we believe we can achieve for the year, however, we are going to manage our business with the mindset, that says our EBITDA production will be less than what we produced in 2008.

And we believe that this conservative approach to how we approach the year, and construct our 2009 plan is appropriate, given the uncertainty of the current external environment.

This will require us to be very conservative with our spending and cost management.

The only two areas of significant new G&A investment in 2009 will be the implementation of our new field audit and franchise training process, and the investments we will be making in our people.

After going nearly two years without salary increases for most of our team members, we have included a salary program for 2009, that will take effect during the second quarter of this year.

And we will also budget as we always do, a team achievement bonus program, and we have had two consecutive years of no bonus for the majority of our team members, which has been appropriate based on the results, however, our Board of Directors has once again set targets that will provide us an opportunity to earn a bonus for achieving our budget plan.

The plan will have two potential payout periods, one for the first half of the year, and one for the back half of the year.

If EBITDA target thresholds are not met for either one of the half-year periods, there of course will be no payout.

Partial payments will be made for performance above threshold but less than target, and 100% payout will be made for achieving the actual target itself.

Now in past years, our team achievement bonus program allowed for participants to earn more than 100% payout if the budget target plan was exceeded.

This has been appropriately modified in this particular year to cap the payout at 100%, in recognition of the difficulties associated with forecasting EBITDA targets during this volatile and unpredictable business cycle.

The bonus program has always been an important component of our Company's compensation and retention program, and we will be working to reactivate it in 2009 by hitting our numbers.

Finally, a comment on our cash management strategy.

We plan to generate as much cash as possible, deploy it opportunistically and wisely, and strengthen our balance sheet.

We have a clear long-range goal, and that is to meet the debt service coverage ratio required in 2012, to extend our current ABS financing, and take advantage of the additional two years of interest-only payment schedule that will be available to us.

We have mapped out a plan to get us there, and I am confident we will do so.

So to summarize, we are preparing for the worst and hoping for the best, despite some recent positive signs in our business, we continue to run the business as if our worst times lie ahead.

We are fixing our domestic business, and although I really like our recent trends, the past few weeks have been among the best I have seen in quite some time.

We intend to continue our efforts to grow our market share, outpace our competition, and regain our domestic sales momentum.

Third, we are investing in our people.

We have a great team here, and I want to retain them, I want to motivate them, to drive the kind of results that we are capable of achieving.

And lastly, I want to continue to generate that all-important free cash, deploy it wisely, and take full advantage of our current attractive financing, by working to extend it as far into the future as possible.

With that, Wendy and I would like to now pause, and take any questions that you may have.

Thank you.

(Operator Instructions).

We will pause for just a moment to compile the Q&A roster.

The first question comes from John Glass with Morgan Stanley.

I guess two questions on the top line, Dave.

First of all, you mentioned clearly a couple of times being very pleased with recent top line trends.

I want to clarify that.

If you were talking about kind of first-quarter trends, if you want to amplify at all.

If you don't, I understand.

But if you can't amplify it, if you can just at least talk about what you experienced in the fourth quarter, as it relates to the incrementality of the sub sandwiches?

I think there has been some confusion, are they been adding to sales or a substitute for pizza orders?

As you settle out and see how the trends are establishing themselves.

Are you building traffic because of the subs, are you growing comps?

Maybe if you can quantify how much the benefit really has been from that product?

Sure.

The strategy with Oven-baked sandwiches was multifaceted.

First and importantly we wanted to ensure that we got all of our stores open for lunch, to open up a new day part.

We successfully achieved that, and obviously sandwiches have put us in the lunch business in a material way, and that has been great.

The second thing we wanted to accomplish with sandwiches was to create something that could provide us the ability to attract new customers, and generate traffic activity in our stores.

After literally two years of declining traffic counts, which have been the fundmental issue that we have had, in terms of getting back to an growth trajectory in our domestic business, the thing that I am pleased to report is sandwiches has driven a significant improvement in our traffic trends, which has gotten the phones ringing, and affords us the ability to have more customers going through our stores, and that is a good thing.

Because when the phones are ringing, we can upsell.

We can substantially improve and increase that order, and the profitability that goes along with it, and we can remarket to those customers, once we identify them, and get them on board.

The last thing that is important about sandwiches is that it is a great addition to our menu is we continue to expand and appeal to more people with the menu.

We like the ratio of the number of sandwiches that are being purchased along with a pizza.

In fact I would tell you that number, although we really don't want to disclose it publicly, is bigger than what we anticipated, and better than what we experienced in our test market.

So we are seeing a number of people who are ordering pizza and sandwiches together, which tells us, that our menu is appealing to more family members, appealing to more people who are looking for more diversity on our menu, and we think that is a positive thing.

So we love the impact that sandwiches has had and continues to have on our business.

The next message that I will give you as it relates to the fourth quarter, without getting into the level of detail that we can't go and don't go, I I will tell you that the trend that we experienced in the fourth quarter that is the most important for to you focus on is the closing of the gap between our franchise system and Team USA.

If you recall for the better part of the last three years, our corporate stores have led our franchise system by as many as 3 and 4%, in terms of sales growth, and that is a problem when you are 93% franchise.

And we have said all the way along, we can't be successful unless our franchisees lead our success, and I think the thing that is really noteworthy that happened, and started happening particularly in the latter part fourth quarter, and again I can't comment specifically on what has been going on in the first quarter, but the thing I am thrilled about that our franchise system is starting to gain momentum, closing that gap, and that is a very important thing for us, as it relates to measuring how we get our momentum back in our domestic business.

Okay, and just to clarify on the Company side, down 2.2% in the fourth quarter.

Were your transaction counts actually positive, and you are losing some on ticket, because of the subs?

Or how does that dynamic work?

Yes, you got it right.

Our traffic comps were positive.

As we enter the lunch business and come out with a $4.99 sandwich platform, obviously it is going to have a certain amount of down pressure on our average ticket, but our traffic was positive, and believe me, that is a significant event based on trends over the last two or three years as I mentioned.

And are you willing to go as far as talk about what the swing in traffic has been from the third to the fourth quarter?

We have never really split out traffic, and if we start to attribute that, we will get into an area that we are not comfortable with, and one that we are not particularly interested in feeding to our competition.

Okay.

One last question.

On currency, Wendy, you talked about currency impacting '09 results.

Is there any way we can look at a relationship between your two or three major currencies, and how it impacts your earnings per share?

Some kind of framework.

10% move in the Euro, or whatever it is, and how much that impacts your earnings?

Well, specifically John, we have told you in the past who our largest markets are, and page 9 in the 10-K, if you want to take a look at that.

If you can track that.

We lay out the number of stores in each our top ten markets.

You can probably track that, but then Dave also stated that we anticipate any growth on the International side, will be negated by our negative FX effects this year.

Yes, that is the assumption, and one of the many difficulties of forecasting 2009, is to kind of know where the dollar is going in it's relationship with these other currencies.

But we have built the plan around the fact that the majority of the growth that we will achieve as a result of store openings, and positive same-store sales in International, the majority of that will be offset by FX.

We are hoping we are wrong but that is what we are assuming.

Thank you.

Your next question comes from Jeffrey Berstein with Barclays Capital.

Great.

Thank you.

Couple of questions.

First on the refranchising efforts, and the expediting of unit sales to franchisees.

David, I think you mentioned 125 F-rated franchisees are now out.

I think you had originally targeted 250.

I was just wondering if you can give kind of the outlook for the remainder, whether you are seeing it slow down, obviously due to the current credit environment, whether you are willing to extend more financing to those franchisees, and perhaps how you are measuring now that those 125 are gone, how do you measure the benefit to comp, or profit from those closures?

Boy, a lot of questions there.

I would tell you that the 125 that I referred to, a majority of those have left the system, but some of them have been turned around, and I only say that because there are really two approaches that we have to this problem.

One is to identify those F franchisees who want to, and are capable of, and are willing to get themselves turned around to the point where they can be reclassified, and thankfully we had a number of franchisees that fall into that category, and hopefully we will have more.

We have other franchisees who can't or won't and aren't willing to do the things that need to be done, and those are the ones that we are changing out, and we have shown a track record that proves that we are willing and able to do that.

That process will continue until I can report to you, that we no longer have any F franchisees.

And we still do, but it is a much smaller number, and we continue to improve upon that as time goes forward.

As it relates to how we dispose of those stores, obviously our first objective is to get them refranchised with another stronger A or B ranked franchisee, and that is what we try to do.

As our business improves, that becomes easier, because the margins at the store level are better, the cash flows are stronger and frankly the optimism in the system, improves to the point where many of our A and B franchisees are more accepting of the transaction, and are more interested in growth, and so we believe that as we continue to build momentum and improve the business, it will be easier to get those transactions done.

In the meantime, we are not taking significant investment positions.

We would rather if we need to take temporary closes, and as you see the numbers, we have shown a willingness to do that.

Last year, we will continue to take temporary closes or permanent closes if need be, as we reconfigure the portfolio of franchisees, as we look at what is best for the profitability of our franchise system, and what is best for the overall brand, and we manage that on a day-to-day basis, and we have a great team working on it every day, in partnership with our franchisees to come up with the best solutions, considering all of those factors.

Okay.

And then actually just wanted to follow up on the Analyst Day from October of '08.

You laid out the bull and bear case scenarios, not official guidance but just sort of ranges.

It looks like you are giving guidance through '09, comps near the lower end of those ranges.

Units I am happy to see near the higher end, and you gave come color on costs.

So with that all said, I don't know, I think you said you were projecting EBITDA to be down year-over-year.

I was wondering with FX where it is right now, is there even a broad range for earnings, talking about up and down based on your current, with all of those parameters in place, how you view earnings for '09?

Yes, if you refer back to what we talked about in terms of those three cases.

Our belief is to do, based on what happens since October of last year, in the world and in the economy, we suggest that to build a model, and base a budget on the bull case is probably an irresponsible act.

I am not going to tell that you anything is impossible at this point, but we have tended to build our current assumptions and run the business, as if we are going to operate somewhere between the middle case and the bear case.

Would that ultimately lead you, was it correct to assume that you are forecasting EBITDA down year-over-year.

The best earnings guesstimate with foreign exchange where it is right now?

With foreign exchange where it is right now, the plan as I mentioned, we will run the business as if that were a possibility, but it is way too early in the year, and there are way too many things moving around, for me to give you a crisp answer to that question.

Okay, lastly to follow up on the prior question of foreign exchange.

If rates were to remain where they are right now, just wondering I think you had guided the fourth quarter saying it would have been a $0.02 hit to the fourth quarter back then.

If rates are what they were right now, what do you see the impact on fiscal '09 earnings?

I don't have that number immediately available.

Basically when we put the budget plan together, our assumption was based on some forward projections that we receive, in terms of what the best thinking of, the best thinking was as it relates to where the dollar was going to be, against the major currencies that we are involved with.

So the hypothetical scenario of it, if the world played out, or the year played out the way the world is today and currencies relate today, I don't specifically know what that number is, and I am looking at Wendy, and I don't think she knows either.

The other item that I would guide you with is that those top ten markets, account for 80% of our International stores.

So if you follow the currencies for those markets, I think it would help.

Okay.

And one last thing, the '09 use of cash.

I think you had said at this point you have been kind of building your cash position.

Is it safe to assume that is the plan going forward, or whether you would return to share repurchase?

Or you mentioned, considering returning to dividend, and not really lending much to franchisees, but use of cash as it is still in stockpile mode at this point?

We have stockpiled a significant amount of cash.

We have done that purposely as we indicated we would at last we were on the phone together, and we felt that during this time period we felt it was the responsible thing to do.

I think we have never telegraphed our intentions, with how it relates to what we are going to do with our cash.

I don't think that is in anybody's best interest, but we are going to do the same thing that we have done in the past, and that is to consider what is in the best interest of our shareholders.

I would comment that one of the driving desires that we have is to take full advantage of this wonderful financing that we have in place, with a slightly over 6% fixed rate, with no traditional covenants, or anything like that.

A very flexible piece of financing, that we want to take advantage of for as long as possible, and we know where we need to get to in the year 2012, to get those last two years to extend it.

And we think that is in the best interest of our shareholders, and we think it is a very responsible position for us to take, in terms of managing our capital structure.

So one of the things that we will be doing is managing the business to achieve that objective.

There are two ways to do that, and likely we will take advantage of both.

One of them is certainly to continue to grow our EBITDA, and get back on a trajectory that affords us the ability to meet that debt service coverage ratio through our EBITDA production, the other way to improve our ratio is to buy back debt, and reduce the denominator, if you will, of that calculation.

So that certainly is something that we will look at probably more carefully than we have in the past.

But we will continue to consider all of the alternatives, in terms of the best use of our cash.

Thank you very much.

Your next question is from Joe Buckley with Bank of America.

Thank you.

Hey, Dave, just to follow-up on the possibility for the one-year extension.

I know you talked a little bit about this back in October, but have you shared with us, or can you share with us the debt service coverage ratios that are critical to getting those extensions, and kind of where you stand right now versus them?

Yes, it is a tricky thing, because if we start kind of releasing what the ratios are, the next question will be, how do we get to the ratios, and as best that we can lay it out for you, that would require about a 1.5 day conference call, for us to get that right.

So we really have never gotten to a point where we share with you specific ratios, and what all goes into the calculations of those ratios.

So suffice to say, Joe, that what we know is where we need to be in terms of EBITDA.

And that is kind of the numerator in that calculation.

We clearly understand the benefits deploying some of our cash against buying back debt, which improves the denominator of that calculation.

And that is kind of how we have planned it out, in terms of looking as part of our five-year plan.

And going further than that in terms of what the ratios are, and then how those ratios are arrived at, is just something we don't feel will be from anybody's best interest, and will be real open to confusion.

Okay.

And just a follow-up on the numerator and the denominator.

Given the fundamental performance over the last year or so, how far off track are you, on kind of the EBITDA you were thinking when this went into place?

We are obviously a bit off, because instead of growing EBITDA as we have expected, we kind of flattened out, but what I think a lot of people either get wrong, or they purposely try to twist, because they are in the short selling game is, they try to position this as a less-than-flexible piece of financing that, and try to put it in the same basket as traditional bank borrowing, where there are covenants and there are potential trip wires that are going to hurt the company, and be damaging.

The reality is, as we have said over and over again, is that one of the beautiful things about this financing is it's flexibility.

And what it offers us in terms of room, to have a year where we don't grow as fast or even two years where we don't grow as fast, and still give us plenty of room to meet our obligations.

We have said many, many times that our EBITDA performance would have to drop by a huge amount, a multiple of any that we have achieved over the past couple of years, before we would even get to the first point that the financing would change, and the only thing that would change about it, is the amount of cash that would be tracked as part of the ABS would slightly increase.

And not to a level that would have any impact on our operations or our investments.

I think we have framed that up, and indicated that our EBITDA performance would have to drop by between 65 million to $75 million, from the point in time we put in place before we would even get to the point where the first trigger would even be a factor.

And so it is flexible.

We don't have covenant issues at all.

What we are talking about is opportunistically extending this very, very attractive financing, and we know what we need to get there.

And this is a very viable plan for us.

Something that we think is very achievable.

Okay.

And then on this topic, but to buy back debt, does the debt trade publicly, or would this be negotiated with holders?

It doesn't trade publicly, but there are holders out there in today's environment, that we think probably have an interest in selling the debt.

And from time to time we hear of opportunities in that regard, and that is certainly something that we will consider.

Okay.

And then I want to revisit also the comment about managing as if EBITDA will be down, preparing for the worst, hoping for the best.

I want to clarify if the guidelines that you have given us for '09.

The '09 outlook section of your release, if those things sort of come in where you are expecting them to come in, EBITDA down year-over-year in '09?

I am just trying to see if that EBITDA down comment is part of your guidance, or just a comment of how you are managing the Company in this environment?

Yes, it is a comment on how we are managing the Company.

We don't give guidance.

We are not going to give guidance, and part of the reason of that is I don't have a clue, in terms of where EBITDA is going to come in at.

Obviously we are kind of through the first two periods.

And so I have a little bit of a sense for the start that we are off to.

But I am just not in a position right now to tell you one way or the other, whether EBITDA is going to grow, shrink, or be the same.

As we get further into the year, we will try to make more comment as it relates to that, but the whole purpose of kind of sharing with you the assumptions of the budget plan, is to show that we are managing the business, as though it is going to be a very, very difficult environment, and we are flexing our spending, and we are making decisions based on those set of assumptions.

Okay.

Very good.

I just wanted to make sure it wasn't kind of a guidance, so to speak.

On the Company versus franchise spread narrowing, there is the sequential improvement on the franchise side was much more significant than the Company's side on the fourth quarter.

And I guess -- I understand your comments about that being good, but I guess I am curious what happened on the Company side that, it didn't seem like the Company side got as big a lift from the sandwiches perhaps, as the franchise side?

Yes, as you know, we changed leadership and as I mentioned in my comments, Joe, we through kind of the initiatives of our new leader, and kind of a whole different approach to Team USA.

We sold stores in a couple of markets, actually three markets in the last year, so we reconfigured the portfolio.

We took that opportunity to take a hard look at the management team.

We changed out a significant amount of our market-based leadership, and I think there was probably some churn, and some negatives as a result of that reset.

Having said that, what is more important and more relevant, is that the reason that that differential between Team USA and the franchisees got down to about 1 point in the fourth quarter, was a growing trend throughout the quarter, and that is momentum in our franchise business.

And I am convinced that Asi and his team will do a great job in Team USA, and as I have already indicated, I think they will have a much better, stronger year, and we are assuming that as part of our plan.

But I also believe based on everything I have seen, that our franchise system is gaining momentum and going to close that gap, and will have a much stronger year than we have seen in the recent past.

Okay.

In terms of using your cash, maybe just talk about I mean you have kind of alluding to some of the things you might consider, but are there any reinvestment needs for the business that go into consideration?

I know you guided CapEx to be toward the low end of the range, and maybe related to that question, what happens with the restricted cash?

Is there some point where the restricted cash on the balance sheet is freed up?

Yes, I will talk about CapEx, and let Wendy talk about restricted cash.

As it relates to CapEx, we think in the times in which we live, free cash flow is the most important thing we can manage, and CapEx projects are being put under an even greater scrutiny, to make sure that we are covering the needs of the business.

But that we are not involved in growth projects that have a long payout, and projects that are viewed as anywhere near the word 'discretionary.' We really bolted that down.

I would tell you that the CapEx budget for this year is less than it was last year, and would be significantly less than it was last year if it weren't for one particular project, that is around $4 million.

That I will talk more about later when I can, but it is a project that we feel is going to have a very short payback, and a very accretive nature, as it relates to it's impact on the business.

And I can't go into the project right now because of a variety of confidentiality reasons, but if it weren't for that one-timer that has got a very short payback, our CapEx disciplines this year are probably as conservative as they have been in my ten years here.

And we think that is appropriate.

Okay, thank you.

And on your restricted cash question, of the $78.9 million total restricted cash, the vast majority is actually accruing to out next interest payment, but there is a portion that is held in a reserve account, that is by the trustee, that we do have an opportunity to have a portion released as our debt service coverage ratio increases, and that is roughly about $17 million in the future that we could look to have released.

Okay.

Okay.

Thank you.

Your next question comes from John Ivanhoe from JPMorgan.

Just a couple of real quick ones from me at this point.

Can you elaborate a little more on the bad debt expense?

Do I understand that was non-payment of franchise royalties?

On the bad debt?

Yes.

That would be a combination of, to a large degree that would be a byproduct of some of the closures that we incurred, and some of this house cleaning that we did, as it relates to our franchise base.

Okay.

I do understand, or I have understood in the past, that franchise royalties are actually extremely high in preference, to the extent there is an issue with the unit including bankruptcy.

Is that the case?

Yes.

I mean, clearly if we have a franchisee turn in the keys, and they owe our supply chain revenues, if they are behind and they owe royalties, in some cases advertising requirements.

In some cases, if we have a franchisee that turns in the keys, we are in a situation where we are going to incur the brunt of whatever those obligations are, that will obviously not be fulfilled.

We try very hard in any kind of transactional mode, to make sure we get rights to any proceeds that would go from a buyer to a seller, to attach to those proceeds in such a way that we get reimbursed for those obligations.

In the close of closures, and when you have an acceleration in the number of closures, you will have more exposure there.

Okay.

Understood.

And secondly, in the distribution business, and even factoring out some of the extra expense of the fourth quarter 2007, from an operating income perspective, it looked better from at least relative to my expectations.

You are giving less franchise stores, and given negative comps.

Anything else that happened in the distribution business in the fourth quarter?

That could have helped margins and reported operating income, that was unique to the fourth quarter, or in fact may even occur into 2009, as we think of modeling that specific segment for next year?

One of the items that we received the benefit of was the reduced frequency of delivery.

We are running our trucks less on the road.

Either making two or three deliveries a week, which is down from the prior year so that is part of the benefit that you are seeing.

We made some formulation changes that afforded us the ability to adjust our delivery schedule, and to a large degree take many of our stores off of a three-delivery-per-week schedule to a two-delivery-per-week schedule, which had a significant impact on our transportation costs.

We have done some other things to try to leverage transportation to create efficiencies.

I think our team and supply chain has done a wonderful job in creating those efficiencies, when diesel fuel got up to the level it did, it really forced us to rethink that whole model, and how we could take miles out of the system, and we were able to do that, and when diesel fuel costs and transportation costs came down at the end of the year, that became a significant pickup, and one we continue to enjoy.

Okay.

Thank you.

Helpful.

Your next question is from Greg Badishkanian from Citi.

This is [Jeff Hans] actually talking on behalf of Greg.

Quick question of you, of the F franchisees that have recommitted to the brand, can you talk a little bit about the type of progress you are seeing from them, and then where would you say most of the low-hanging fruit is, pricing efficiencies, is it better local marketing strategies?

First of all, as it relates to the F franchisees, since we put them in their own category, we measure them every six ways to Sunday.

We are looking at them from the standpoint of how are their same-store sales performing versus the rest of the system.

How are their OER audits performing versus the rest of the system.

We are managing their P&Ls very carefully, because we are talking to them regularly to see what is going on in terms of their margin trends.

We are putting extra attention in those stores, to make sure that the product and the service and the image standards that we are hold dear, are being executed.

We are kind of all over them.

When I tell you that someone has rehabilitated themselves, and gotten off the F list, and onto the A or the B list, you should know that is not a subjective evaluation on our part.

It is based on a very, very set list of objective criteria.

As it relates to where is the low-hanging fruit, if it was any one thing we would have done it already.

It is a combination of a number of things, but here is the real deal.

And the real deal is in our world, once we start to see traffic moving positively, great things can happen, because when the phones are ringing, there is a lot we can do to create momentum in this business, and make that order more profitable, and remarket to that customer, and all of those things that we do very well.

When the phones are silent, it is really, really hard to get yourself out of a tailspin, and the most important thing I have said today, is the fact that particularly in the latter part of the fourth quarter, momentum began to build in terms of traffic.

We started comping positively in terms of our traffic growth.

I indicated we feel very good and optimistic about what we have seen in the recent past, without getting into details.

And all of that is the result of more customers getting involved in the brand.

Our stores having more customers at their disposal to work with, and that spells good things.

All right, thanks.

One quick follow-on.

Back in October you had mentioned that the financing markets for even A and B franchisees were essentially shut down.

Has that changed at all since October?

Even January or February?

Yes, this is an answer based more anecdotally than anything specific, because it is very situational specific, in terms of what deals we have gotten done, and where the financing has come from.

I would say generally speaking the environment is slightly better, but still very tough.

We have seen some transactions occur with some financing partners stepping up.

Probably more than I could talk about when we visited this issue in October.

But I think it is still a very, very tough market in terms of Main Street having financing available for those small business owners who are looking for financing.

The one thing that has happened though, as the business trends from started to improve, and there is more optimism across our system, the larger players who can get some financing, or in some cases can self-finance, are really taking advantage of the opportunistic buys that are available from some of these F franchisees who are exiting the system.

I can give examples of three or four markets where we have had strong operators, with strong balance sheets, come in and take over stores at prices that are ridiculously low, and within a very short period of time, create improvements where the cash-on-cash returns of that investment are going to be astronomical.

So we are starting to see that activity, and that is a very good thing, and it bodes well for the future.

All right, thanks

The next question is from Tom Forte from Telsey Advisory Group.

I have a question on two things, to what expense will the decrease in commodity prices, both diesel and cheese, is giving your franchisees a greater ability to be more aggressive on price?

And then number two, how do you assess the consumer's appetite for a premium product in this environment, to the extent that you are rolling out the American Legends pizzas right now?

Commodity pricing is helping a lot, but I wouldn't say that commodity prices have changed the pricing structure at all.

I think delivery charges are staying where they have been.

I think menu prices have stayed where they have been.

In fact, promotional prices points, if you look at our current TV, we are promoting at a higher price point than we have on TV in quite some time, with our Legends line of pizzas, and so I don't think we are seeing any kind of diminution on price, based on the roads that our franchisees have traveled over the last year, and not only our franchisees, but everybody's franchisees.

I think pricing discipline is probably higher than it has been in a long time, and consequently the reduction in commodities has improved margins, which is what is required, and so that is a good thing.

So the thesis that commodity prices are down, and prices are going to fall, at least to this point we haven't seen it, and I don't anticipate that in the near future.

As it relates to the premium priced products, I think as we have discussed over and over again, our barbell strategy, we recognize that there are people out there that are looking for value price points, and looking for that value menu concept.

Because that is all they can afford, and we have talked a lot about what we are doing to address that, and there will be more to come on that, but value is a very, very important part of the equation.

However, there are still a number of consumers out there, who just want a great-tasting product, and they are willing to pay a little bit more, for something that is at a medium level, where they still perceive a lot of value.

But it is value at a slightly higher price.

And I am not in a position to comment on the experience that we are having currently with our Legends line, other than to tell you I am really, really glad that we are getting into that end of the business, because what we have seen has proven to us, that there are customers out there that have looked at us for that brand, and they are pleased to have it.

Thank you.

Your next question is from Michael Wolleben with Sidoti & Company.

Good morning.

Thank you.

I was wondering if you can kind of of address with the falling commodity costs, is this relieving any pressures from franchisees who were on the cusp of closure, or how is that really affecting their businesses?

If we can execute a year where commodity prices are anywhere near reasonable, versus where they were a year ago, where commodity prices behave themselves, and I would say at current levels that is a fair characterization.

If we can sustain these kind of levels throughout the year, and concurrently, we can build some positive sales momentum, particularly in our franchise business, the combination of those two factors will accomplish two very important things.

It will improve margins and will take some of our bottom 20% operators, who have been living hand-to-mouth and have been working on margins that are so skinny, that they question whether they can sustain themselves.

Many of those operators will be benefited by improved margins, and will continue to stay in the business, and build their business.

The concurrent issue, though, is that some of those low margin, smaller players, who still feel as though the economics aren't working in their favor, the benefit of having a stronger margin, stronger cash producing business model, will give our larger players the confidence and the resources they need to buy up some of those stores, which oftentimes is an even more favorable outcome.

So either one of those scenarios is positive for the brand.

Either one of those scenarios would relieve pressure on closings, but if we can execute and get a more reasonable commodity market to work in our favor this year, those are likely outcomes.

Great.

And just looking at the openings in the quarter, and kind of back to the franchisee credit issue, and the net closures that you guys expect here in 2009, 50 stores opened here in the fourth quarter.

To get to that net closure number, can you kind of give a breakdown on what you are expecting for openings and closings?

Are closings going to be more than they were in '08, or would you expect that number to start to decline?

Yes, that is one of those very, very tough numbers, and I try not to throw numbers out there unless I have a fair level of confidence.

I mean I will have a better handle on that maybe mid-year, because I will see what is going on with commodities, and how things are going in terms of sales trends.

We put a plan together, as I mentioned to you, that has net growth for our overall system of between 175 and 225 stores.

That assumption is that we are going to rely heavily again on the International growth to kind of carry the day.

It assumes that we would have some net closings domestically.

But whether it is as many as we did last year, or more favorable than last year, it is just something that at this early stage of the year is really hard for me to peg for you.

So that is a question you can ask me after the second quarter results, and I will have a better handle on where I really think the year will shape out.

Okay.

Just one more question.

I know you guys have usually stated the EBITDA cushion for the first cash relief trigger was 65 to 75 when you put that in place.

What is that cushion at now?

Given 2008's EBITDA?

It is basically the same.

It is still in that range.

Exactly.

It is still in that range.

Yes well, it is still in that range based on the assumptions that we negotiated as part of the ABS at the beginning.

Great, thank you.

Yes.

Your final question from Colin Guheen with Cowen and Company.

I guess just a longer-term question.

Getting back to 20% margins on the Company side, given a less cyclical environment.

Is there anything structurally different in the category right now in the way the business is managed, that may prevent to you get back to that 20% margin margin level in a more normal environment over time?

I don't think there is anything structurally going on.

It is still a huge category.

There are still stores being built.

It is very relevant that we opened a bunch of new stores in 2008.

It is like building a boat in the middle of a hurricane.

There are still entrepreneurs out there who see a very, very large category called 'pizza,' where there is a lot of money to be made, and margins and cash-on-cash returns can be as good or better, than any other place in the QSR industry.

And that is still there.

There are still people who are willing to invest in that, and build stores even in the worst of times.

I think what is happening in our category right now is all positive.

I think the fact that we are all working hard to expand our menu, and appeal to more people and more day parts, with more price points and more variety.

I think the fact that we are all out there trying to stimulate traffic and interest in the category, is a very, very positive thing.

I believe the fact that we are all out there in our own way approaching this whole barbell strategy of trying to appeal to the lower end of the spectrum, in terms of price expectations, at the same time, we are lifting quality and providing premium products to people who see value in those.

I think what we are doing generally as a category is all positive, and bodes well for the future.

So the people out there spewing negatives whether whether people will keep eating pizza, and whether this is a category that continues to be huge, and provide a lot of potential for those of us who are competing in it, I think anybody who is out there trying to diminish those opportunities, doesn't understand the business.

But we are going through a period where there is a bit of a renewal, and a reenergizing as it relates to the menu and the activity and the price points, and that is going to be healthy, and I think means good things for the future for our franchisees as well as our brand.

And given your specific strategies, you believe that 20% company store margins are achievable in the future.

There is not something in product mix, or a way kind of new innovation that has come around that can inhibit that or--?

Whenever you put a percentage to the future, I have a whole bunch of people that look at me and say, we don't provide future guidance, as it relates to percentages and expectations.

I will just tell that you I think the business has the same kinds of profit opportunities in the next five years as we have seen in the past.

There is nothing systemically or structurally that I see that precludes us from getting back to a level of cash flow production that we have enjoyed for many, many years, notwithstanding the disappointments of the last couple of years.

Thanks a lot.

You are most welcome.

This concludes the Q&A portion of today's call.

I would like to turn the call back over to Dave Brandon.

Good.

Well, we ran a little long we are Q&A than we normally do, but I think that is appropriate, and I appreciate all of your good questions.

We have tried to give you more information than we have in the past, in terms of what our thinking is going into 2009.

We believe that the uncertainty of the times make that appropriate, and your job has got to be just as tough as ours, as it relates to modeling and making investment decisions, based on projections and forecasts.

Hopefully we have provided you information that will assist you, and be beneficial today.

I can close by saying that I want to assure you that the Domino's team will be working with a lot of passion, to build a stronger business for the future.

We are excited about we have seen in the recent past and we hope to build on that, and I believe that I speak on behalf of our hundreds of franchisees in the domestic system, that they are prepared to lead the way, and we are prepared to partner with them to do that.

We look forward to reporting on our first quarter results, and in the meantime, best wishes to all of you, and thanks for joining us today.

This concludes today's 2008 fourth quarter and year-end earnings call.

You may now disconnect.