達美樂 (DPZ) 2009 Q1 法說會逐字稿

Good morning.

My name is Casey, and I will be your conference operator today.

At this time, I would like to welcome everyone to the 2009 first quarter earnings conference call.

All lines have been placed on mute to prevent any background noise.

After these speakers' remarks, there will be a question-and-answer session.

(Operator Instructions) Thank you.

I would now like to introduce our host for today's call, Lynn Liddle, Executive Vice President of Communications and Investor Relations.

Ms.

Liddle, you may now begin.

Thanks, Casey.

And thank you, everybody, for joining us this morning.

We will try to keep our comments relatively brief and keep the call to no more than an hour.

Housekeeping items -- we try not to say a lot of forward-looking statements, but in the event that some are disclosed on the call, I will forward you to our Safe Harbor Statement in our Q and in the 8-K.

And then, I would ask the members of the media to please stay in a listen-only mode, being that this call is for investors primarily.

And with us today, we have our Chief Financial Officer, Wendy Beck, and our Chairman and CEO, David Brandon.

And they will make some prepared remarks, followed, as Casey mentioned, by Q&A.

So with that, I will turn it over to Wendy, our Chief Financial Officer.

Great.

Thanks, Lynn.

And good morning, everyone.

I am very pleased to report that we posted a positive 1% domestic same-store sales number in the first quarter, which is our first positive domestic comp in quite some time.

We are starting to build momentum domestically, which is very important in our business.

And we know it builds upon itself.

We also had some lower costs working in our favor this quarter.

And our international division continued its strong sales trend.

All of these positive signs are early, but ones we are very excited about.

So turning to our results for the quarter, the best way to gauge how our business is doing is to first look at the top line.

Our global retail sales were down 4.6% for the first quarter, resulting from the negative impact of foreign currency.

However, excluding the impact of foreign currency, our global retail sales grew 5.6% during the first quarter.

This was driven primarily by international and domestic same-store sales growth and store count growth in our international business.

Now looking at those individual components, we are extremely pleased to report that our domestic same-store sales were positive 1% for the quarter versus the first quarter of 2008, as this has been a major focus for us for quite some time.

Franchise same-store sales grew 1.1%, leading the way, while Company-owned stores were virtually flat at a negative 0.1%.

This is the first quarter that our franchise system exceeded our Company-owned stores in same-store sales since 2004.

Entering into 2009, we anticipated additional domestic closures reflecting both continued economic challenges and the Company's efforts to strengthen the system over the long term by weeding out under-performing franchisees.

In fact, we closed 71 stores domestically during the first quarter.

On the positive side, we opened 11 stores in the quarter, which gives us a net closure of 60 stores in the quarter.

In addition, we do plan to reopen some of the stores that closed.

International same-store sales were positive 6.6% on a constant dollar basis.

And this marks the 61st consecutive quarter of international same-store sales growth.

Additionally, our international division grew by a net 16 stores in the quarter.

As a result, our total revenues for the first quarter were $321.8 million, a $17.2 million or 5.1% decrease from prior year, the majority of which was due to the store divestitures in 2008.

Breaking down the decrease, our Company-owned store revenues declined $12 million or 13%, all of which was due to these 2008 store divestitures.

Domestic franchise revenues increased approximately $500,000 or 1.4%, primarily due to higher same-store sales that were offset in part by the lower store counts.

International revenues declined $2.9 million or 8.8%, due to the negative impact from foreign currency.

As mentioned on our year-end call, we anticipated a negative impact from foreign currency throughout fiscal 2008.

This did negatively impact our royalty revenues by approximately $3.9 million in the first quarter.

It also impacted our international supply chain revenues by $2.1 million in the first quarter.

We know that FX is affecting everyone in this space.

And we also know there are likely questions as to how we treat the issue of hedges.

Currently, the Company does not hedge its exposure to fluctuations in foreign currency.

We consider the long-term impact of these currencies versus the short-term view.

We have looked at a tenure chart of rates and found minimal movement up or down over this timeframe other than the current volatility we are seeing.

As such, we expect to continue to see volatility in foreign currency during 2009.

The declines in international revenues were offset by approximately $3.1 million of revenue improvements, primarily due to higher same-store sales and increased store counts.

Domestic supply chain revenues decreased approximately $2.7 million or 1.5%.

Lower cheese prices hurt our supply chain revenues, but do not impact our supply chain dollar margins.

However, these lower cheese prices benefit our domestic store unit economics.

The decrease in cheese prices were partially offset by increases in non-cheese commodities during the first quarter.

Now let's look at our operating margins.

Our consolidated operating margin as a percentage of revenues increased 1.6% in the first quarter versus the prior year period.

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

There were essentially two main operating margin variances.

First, our supply chain margin increased 1.9% from the prior year quarter, which resulted in a 1.5% increase on our consolidated operating margin.

One percent of that consolidated margin increase was due to lower cheese prices in the quarter that had no impact on dollar margins.

The average cheese block price in the first quarter was $1.23 per pound versus $1.93 last year, a 36.3% decrease.

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

Offsetting the supply chain margin increases were higher non-cheese commodity prices on items such as chicken, meats and boxes.

So when you look at our overall market basket, which is comprised of our top commodities, cheese is down enough to drop our overall basket, but the commodities making up the other two-thirds of our market basket are up, which is eroding most of our savings from cheese.

The second main operating margin variance is that our Company-owned store operating margin increased 1.3% from the prior year period, which resulted in a 0.4% increase in our consolidated operating margins.

Lower food, labor and delivery costs accounted for a majority of the margin increase.

Food costs as a percent of revenues were lower because of cheese costs, while delivery costs were lower because our driver delivery reimbursement has dropped with lower fuel prices.

Labor was positive for us in the quarter, as we continue to leverage our Pulse Point of Sale System as well as focus incentives on labor to drive efficiency.

However, we anticipate a negative impact in the last of the Federal Minimum Wage increases, which will hit us in July 2009.

Now let's look at our G&A expenses.

G&A increased $5.2 million in the quarter versus the prior year.

Breaking down the increase, a net $2.8 million of the increase was from gains recorded in the first quarter of 2008 related to the sale of 29 stores, offset by separation expenses from a reduction in force last year.

Excluding these items that affected comparability, G&A increased $2.4 million versus the prior year quarter, due primarily to an increase in our labor costs as a result of us not hitting our performance-related targets in 2008 and never recording less bonus expense in 2008.

On the income statement, you will also note that we had a $21.2 million gain on the extinguishment of debt, which I will discuss further in a moment.

Next let's look at bottom-line earnings.

Our first quarter diluted EPS as reported on a GAAP basis was $0.41, or $0.20 when adjusted for items affecting comparability.

The $0.20 as adjusted EPS figure is a $0.01 decrease from the $0.21 in 2008.

Foreign currency negatively impacted us by $0.04.

And our operating results benefited us by $0.02 in the quarter.

Our EPS also benefited $0.01 from the lower share count, primarily due to our share repurchases in 2008.

Now let's look at our balance sheet.

In the first quarter we repurchased at a discount $43.3 million of principle on our senior notes for $22.3 million including accrued interest.

This resulted in a pretax gain of $21.2 million in the quarter.

Subsequent to the quarter, we repurchased an additional $25 million of principle on the senior notes for $12.3 million including accrued interest.

This will result in a pretax gain of $12.9 million in the second quarter.

We opportunistically used $21.3 million from a revolver in addition to cash on hand at a variable interest rate that approximated 2% in the first quarter.

Additionally, we took advantage of stimulus plan tax incentives which allows us to defer the gain on these debt repurchases until 2014 and beyond.

We continue to generate strong free cash flow, which feeds our robust cash position, ending the quarter with $67.9 million of unrestricted cash.

In closing, our cash position continues to be strong and our debt repurchases that we will opportunistically use our cash to drive shareholder value.

While we are pleased with our overall results, especially in light of this tough economy, we are cautiously optimistic about this early momentum.

This concludes our financial update.

I'd now like to turn it over to Dave.

Good morning.

And thanks, Wendy.

Before I get into discussing the quarter specifically, I wanted to spend a couple minutes with you discussing a couple of things that are -- have certainly been in the news of late.

And I'd like to start off with what we call the YouTube incident here at Domino's.

I think we and most of the rest of the marketing world realized a couple of weeks ago the impact of what I think is becoming known as the social media viral attack.

And I'm sure all of you heard about it.

It was covered in mainstream media at the same time.

We certainly created quite a buzz on the internet.

And I just want to respond a little bit to give you a sense for where we are with that.

The response team here at Domino's I think did a phenomenal job.

It was led by Patrick Doyle, our president of Domino's USA, our communications team.

We identified quickly that this had occurred.

We immediately began working with all of the stakeholders in this problem that were important to get involved, including the local authorities.

Arrests were made.

Even though this was very much characterized as a hoax, we took it very seriously and took all the measures to bring in the Health Department and give that store in North Carolina a very careful going over.

We took all the action we could take in terms of getting the message out that this was a hoax and that these were -- this was a bad idea from a couple of very, very misdirected people.

We're -- I'm pleased to report that as we monitor what's happening in the social media network, and now that we're two weeks later, this has definitely gone more -- far more into the background in terms of the buzz around it.

The confidence in our brand is recovering in terms of the measures that we have of what's being said in the social media, the coverage in the mainstream media, although it certainly drove a lot of people to watch this disgusting video.

Most of the coverage was very positive in the way that we handled it, the way we responded.

And so I'm pretty much ready to put this whole issue to bed.

The only thing that I want to say is the biggest damage that was done as part of this was the way it characterized team members at Domino's.

And maybe that's as much an internal issue as it is an external issue.

But I just want you to know that since the last time that I was on one of these conference calls, I celebrated my tenth anniversary as the CEO of Domino's.

And in the course of that decade of service, I have watched with amazement the way team members of this company respond in difficult situations.

And I was here for 9/11.

And you can go back and see that one of the first food service companies to open their stores with portable gas tanks and the authorities allowing us to get our trucks with food supplies into our stores, we were feeding rescue workers when nobody else could do business when the dust hadn't settled from the towers coming down.

We gave away tens of thousands of pizzas as we were the last stores to close and the first stores to open when Katrina hit.

I have story after story of drivers of Domino's pizza who have found lost children, who have been first on the scene of accidents and helped saved people's lives.

They've rushed into burning homes.

And they are on a daily basis subjected to everything from muggings in that they oftentimes at personal risk drive around at night with signs that say I have food and I have money.

We drive 10 million miles a week, oftentimes at night, and certainly oftentimes in inclement weather.

And they're subjected to and, sadly, experience the problems associated with driving in those conditions with accidents, sometimes of a fatal nature.

They work long weeks.

They work weekends.

They work holidays.

They work under challenging conditions.

And at any given time, there's 125,000 to 150,000 of those team members out there doing their jobs, and doing them well.

And sadly, we had two people with a twisted, sick sense of humor -- and I can't tell you they exercised poor judgment.

I can tell you they exercised no judgment at all -- who were mistakenly allowed to work in a Domino's Pizza store in a small town in North Carolina.

And sadly, those people took a shot at every one of our team members across the globe.

And sadly, in some cases they shook the confidence of some of our customers, both current and prospective.

And that makes me very sad -- also a tad angry.

Because all of those heroes who come to work every day and do their jobs with pride and hustle and great care -- sadly, their contribution was somewhat diminished by these two idiots.

So I think where we are now is, we're past it.

And we're moving on.

And those customers whose confidence was shaken, we're going to win them back.

We've had challenges before.

And we can certainly overcome this one.

In the short term, it was rather painful and ugly for us.

But over the longer haul, we think we'll come out of it better and stronger, and work even harder to convince anyone who believes what they see on the Internet that we're the same great quality Company that we've been for the last 49 years.

And that's about all I have to say about YouTube.

The other thing that's in the news is obviously the swine flu virus.

We're watching this very carefully.

We've been involved in these kinds of matters, not so much in the US as much as in some of our other international markets.

When it comes to these kinds of epidemics, I would tell you that we are often a solution for people who wish to stay home and don't want to be out among crowds.

We will deliver hot food safely to their homes.

So we think that we can be of great assistance during this time.

Our approach to it is to follow the instructions that we've been given by the authorities and the health officials.

We are going to set a world record for the amount of hand washings that take place in a retail store.

We have done a forced shipment to all of our stores as it relates to all of the various products that we can use to make sure that we're sanitizing.

We always do that on a regular basis as part of our protocol, our training and our auditing.

But our objective will be to triple the amount of hand washing that we do and following the strict instructions and guidelines that are being given for ways to stay safe and avoid this virus.

We're also going to provide that same opportunity to -- in the form of dispensers -- to customers who are coming in our stores.

And we're going to do everything we can do to stay in business, service our customers and make sure that our people are safe.

We will be very stringent about, if any of our team members are not feeling well, encouraging them to stay home, and following all the instructions that are being given as the best practices for avoiding this virus.

And, as we always do, we'll attempt to help people at this time of stress and need.

And perhaps being in the home delivery business with hot, great-tasting food, we can accomplish that.

With that, I'd like to shift over to our results in the first quarter.

And you may have concluded from Wendy's remarks that lately, when it comes to the actual performance of our business, it is felt a bit more fun to come to work than it was there for a while.

Although we're still navigating through some tough and unchartered waters, we feel we're making good progress.

And many of the initiatives that we've launched over the past couple years are starting to pay off by helping us achieve better results.

In fact, we're beginning to reestablish our leadership position in several years.

Most important, our domestic franchisees are experiencing better results.

Notably, our franchise system out-performed our Team USA stores in comps -- in sales comps for the first quarter for the first time in many quarters.

We see this as a very positive indicator, since our business model should always work this way.

Our franchisees are entrepreneurs who have skin in the game and a passion to win.

And they need to set the pace for our business.

Momentum is a key factor for us to create success at Domino's.

And we're starting to feel it again in several areas of our business.

This is resulting in a reinvigorating of our franchise community, who I believe will achieve some significant victories in the months and years ahead.

Franchise relations are strong right now.

And we're working more closely with our franchisees than any time I can remember.

Both our franchisees and our Advisory Boards and the Domino's Franchise Association are all working hand-in-hand with us on the product and technology innovations that we're rolling out, creating operating and purchasing efficiencies and moving our domestic business forward as a team.

Our efforts to eliminate the "F" franchisees have proven successful through a combination of improving of some to the "A" and "B" levels, attrition of some of them through financial failures and a hard line on not allowing mediocrity in our system.

All in all, we've eliminated over 100 F's since the beginning of 2008.

And although this will be an ongoing effort, we feel we've done the majority of the cleanup that was necessary to significantly strengthen our franchise system.

As a result, we feel it's time to quit talking about the remaining F's.

There are some, and we'll be dealing with them.

But we think it's time to move forward with a more positive focus on our great franchisees who are doing a terrific job.

We've had positive feedback from our franchisees on the efforts we've made in the area of training and auditing.

You'll recall that we made an investment this year in a new audit team.

And we're recertifying all of our franchisees this year through a high-performance franchisee training program.

Stan Gage, our Vice President of Learning and Development is leading this effort and doing a phenomenal job with his team.

And the feedback we've gotten from franchisees attending the initial classes has been great.

And we're coming up with lots of ideas and improvements together as part of this important initiative.

Domestic store openings will continue to be tough in the current economic environment.

So we don't expect that our original estimate, which was to be down by about approximately 100 net stores domestically for the year, will likely improve.

Unfortunately, I don't think this is going to be an uncommon scenario among all retailers as they report their results through 2009.

However, third-party research and some recent public announcements indicate that we're leading our national competitors in traffic growth.

Product innovation has contributed to these positive results.

Our line of oven-baked sandwiches has been a winner with the opening of a new day part.

Our Domino's American Legends Pizzas have had a very positive impact on our business.

We're selling these products at premium prices.

And the impact that they're having on our menu variety, our quality perception and overall sales is totally consistent with our objectives when we launched this exciting new product platform.

Now both of these platforms also provide great opportunity for future growth and expansion through the introduction of line extensions and new products.

Our Bailout Campaign presented a new twist on our now classic 5-5-5 Promotion, which has been a proven traffic and ticket builder in the past and delivered a value message at a time when America was really looking for one.

Together these products and promotions have filled out our menu offerings and helped us to further develop our barbell pricing strategy, something we've been talking about for quite some time.

We are providing more choice to our customers and adding dining occasions for Domino's.

I'm also happy to speak about our latest product platform, BreadBowl Pasta.

We now have five varieties of single-serve pastas dished up in a savory, hot bread bowl.

Although consumers can also get the pasta without the bread bowl, I have to say it's really tasty to tear off a piece of that bread bowl and enjoy it with the pasta.

More to come on this, since we've only just launched the product nationally very recently.

But we're really excited about this new and totally unique approach to marketing pasta in the United States.

A couple of additional notes on the expansion of our menu.

We're known for the simplicity of our store footprint and the efficiencies we leverage within it.

As we've added new products, we continue to work within that footprint and maintain efficiencies in our operations.

Sandwich, for example -- sandwiches, for example, were added with just a $250 per store investment in small wares.

No new lines, make lines or large equipment needs or capital outlays.

Same with pasta -- a few new ingredients, all made in the same compact kitchen.

As we add various products, we'll obviously have to vary our price points and margins on an individual product basis.

I want to emphasize to you a basic concept about how the math works.

And I want to train our investors as we train our franchisees on this important subject.

We don't put percentages in our pockets.

We bank dollars.

Sandwiches again are all about traffic, the lunch day part and a new platform for expansion, while also generating terrific incremental profit.

So although it's hard to beat the percentage on a margin basis on just selling cheese pizza, we don't want to be the best pizza-only company in America with negative traffic trends.

We want to be the company putting increasing levels of cash in the pockets of our franchisees as well as our investors.

So if the average ticket on a sandwich order is a little lower, we can and will, as we've proven, happily live with that as we continue to drive traffic.

All of this product innovation requires that we back it with marketing and advertising clout.

And we're doing that, too.

Our Chief Marketing Officer, Russell Weiner, and his talented team have shown great commitment and creativity, and continue to measure and improve upon our marketing tactics and our execution.

And our franchisees are showing great support by providing added dollars for national marketing.

We're rapidly moving towards a share of voice level that will make us not only more competitive, significantly up from last year, but back to the levels we saw in the great success year of 2005.

Our technology platform works as a great enhancement for our system, too, as online ordering continues to grow in popularity virtually every day.

And our Pulse technology has helped on the cost side as well, as franchisees use these tools to schedule labor more efficiently, to detect and prevent internal theft and a whole host of other benefits that that technology brings to them as retailers.

On the cost side, we're benefiting from the lower price of cheese, with a cheese block down over 36% versus the previous quarter of 2008.

We have to caution you about getting too excited about that, because the overall basket of products that we buy is only down by mid single-digit percentages.

Because, sadly, not everything has come down as far as cheese.

But we're certainly pleased to see some of the excruciating price increases that we were absorbing on almost a weekly basis last year easing a significant amount.

And while we've done a very good job of creating efficiencies within our supply chain division, David Mounts and his team have done a terrific job.

We've substantially increased up the profits flowing from this business and, most importantly, the profit-sharing checks that go to our franchisees.

Because as you know, that's a partnership.

And as we create efficiencies, we put money back in the pockets of our franchisees.

And that's so important in today's economic times.

Essentially, we've geared our supply chain business around $3 to $4 gas prices by driving savings and reengineering a lot of processes.

We've done re-routings.

We've vertically integrated.

We've negotiated creatively.

And certainly, at the present moment, with fuel prices being far more reasonable, we've reaped benefits of those efforts across our whole system.

I'm going to shift over and talk a minute about our international business.

It obviously continues to perform very well.

The foreign exchange effect was a significant drag on this quarter.

I only wish we could capture all of the gains that Mike Lawton and his terrific team at International have generated.

Sadly, FX has been a significant factor.

As you know, we budgeted conservatively for this at the outset of the year, because we were concerned about this issue.

And we stated that we believe the majority of our gains in International this year would be offset by foreign exchange.

Today, we're even a little bit behind that conservative estimate, based on what's been happening with the dollar.

Having said that, we've seen recent trends of that reversing a little bit.

And we'll continue to monitor this closely as we work further into the year.

We'll control what we can control, which is driving same-store sales and building and opening stores.

We'll continue to push our international business forward.

And we'll just have to let the currency issues fall as they may.

International store openings outpaced the quarter a year ago, which is great considering a somewhat uncertain global economic environment.

So we still feel good about the net growth projections for the year in our international business.

We reported the closing of nine stores in Costa Rica during the quarter.

We already anticipate reopening that market in the coming months.

And we're very pleased to announce the opening of Spain as a new country for us via a conversion of existing stores.

Although conversions have happened from time to time in the history of our international business, they are not a typical way that we grow our international markets.

However, our new master franchisee, [Zena], approached us a while back to convert their existing stores to the Domino's brand.

And we were able to negotiate a terrific deal for them and a terrific deal for us.

Although we do not expect this to have a material impact on our 2009 financials, we do estimate that this will result in over 80 Domino's Pizza stores being open and operating in Spain by year end, which will not only give us a great presence in a large market where heretofore we have not had a position, but it will also create a very strong platform for future growth in the very large and important market.

Same-store sales internationally remained strong across broad sections of countries and continents.

And overall we're very pleased with what's happening there.

Mike and his team, as I said, continue to do a great job.

Wendy touched upon our balance sheet.

We're continuing to take a conservative approach to ensure that we meet or beat all of the hurdles required to extend our ABS financing structure for as long as possible -- and for us right now, that looks like 2014 -- through a combination of growing our EBITDA through improved business result, and also buying back debt opportunistically.

And as you've seen, we've been able to do that in the recent past.

Overall, the Domino's team is energized by the momentum we're starting to build.

I hope you can hear that and feel that in my voice.

We're pleased about the progress that we're making in the quarter.

And we definitely feel like there is a light at the end of the tunnel, which is a great feeling.

With that, Wendy and I are happy to take your questions.

(Operator Instructions) We'll pause for a moment to compel the Q&A roster.

And your first question comes from Joe Buckley with BSA Merrill Lynch.

Thank you.

Good morning.

Good morning, Joe.

Question on the margin improving in the quarter.

And I appreciate the cheese effect on the -- on the supply margins.

But you also saw some margin improvement on the Company stores and in the international business as well.

And I guess I'm curious what you're thinking about the sustainability of those margin levels as the year goes on.

On the supply chain side of the business, we feel really good that we will be able to sustain the momentum that we've seen there.

Cheese costs, food costs, commodities -- it's hard for us to say, Joe.

We certainly would love to see the other commodity costs start to move down so we can see a greater effect of the cheese cost.

But it's hard for us to anticipate.

All the other efficiencies, though, that we're driving on our own Company stores -- Team USA side of the business and supply chain, though -- we feel pretty good about the fact that we're going to sustain those efficiencies.

The combination of better food, not only cost, but also food management, the better labor management that we've seen in the first quarter -- Asi Sheikh and his team are doing a terrific job of managing costs, I think tighter than we ever have -- and then added traffic and the fact that we're continuing to bring in new customers.

I know Team USA didn't have a great same-store sales performance.

But they were up against a tougher comp.

And their US levels are still strong.

And consequently, if we can continue to operate and improve in the way that we did in the first quarter, hopefully we can keep that momentum going.

Okay.

Dave, you've talked in the past about hoping to qualify for the one-year extensions on our debt agreement.

But you said it a little more forcefully this morning.

Is your confidence growing on being able to extend the debt agreement to 2014?

Well, certainly when we're able to go out there and buy debt back at $0.50 on the dollar and then have the stimulus package offer us the ability to hold off on the booking of any of those gains until the year 2014 with a five-year amortization, those are new developments since the last time I talked about this issue.

And I can tell you it certainly provides a lot more -- even more confidence than I had.

And I've always been very confident that that was a very flexible and achievable target for us to hit.

But clearly, being able to claw back that debt in a very tax-efficient way and get it at that kind of price was a great trade.

I'm very proud of Wendy and her team for making that happen.

And certainly, we'll continue to scan the world out there.

And opportunistically, if we have those chances that come available once in a while for us to use this free cash we're generating to further de-leverage, that just takes more pressure off of the EBITDA growth we need to achieve to get to that ultimate BSCR ratio.

Okay.

And then one last one, just on Mexico.

Do you know if stores were permitted to stay open because you're delivery down there?

Or did you end up having -- your franchisee end up having to close stores?

Or what's the situation?

Yeah, I'm getting reports from Mike Lawton, who's over -- he's all over this several times a day.

And it's really a moving target there.

There are some -- there are some areas where my understanding is we have closed stores.

And that is not broad scale.

The reports I've gotten are more like a handful of stores in certain areas.

There are other areas where our people are wearing masks and are taking extra precautions, but we're operating.

In many instances, our stores are closed for carry out and dine in, because we do have a number of stores in Mexico that have sitting areas.

We don't do table site service, per se, but there are areas for people to congregate and eat in the stores.

And in many instances, those practices have been curtailed based on the direction being given by the Health Departments down there.

But the flip side of that is our delivery business obviously is, in many instances, very strong.

Because as people -- as I indicated earlier, people can't leave their homes and don't want to leave their homes, they're in a situation were oftentimes delivered food is a great solution.

So I don't know where it's all going to shake out in terms of its impact on our sales.

But right now, if you balance all those various competing issues, I think we're kind of in a steady-as-she-goes mode in Mexico.

But it's obviously a very, very fluid situation.

Okay.

Okay, thank you.

Our next question comes from Jeffrey Bernstein with Barclays Capital.

Great.

Thank you.

A couple of questions -- one, just to follow-up on that question about leverage.

And I think you mentioned a few times that this was somewhat opportunistic, being able to claw back that debt.

Just wondering whether there's any change then in the select process on future leverage?

Or would you say that this is really just when these type of opportunities present themselves, you'll do it on a small scale?

I would never say never.

We're going to continue to watch these capital markets.

If there's financing opportunities that are available and there are a variety of different mechanisms as to how that would work, we may look at those as ways to generate some funds that would allow us to go out and take further advantage in a deeper way.

We'll certainly -- we have looked at that.

We've talked about it.

And we'll continue to look at it.

We're generating about $1 million of free cash a week.

And obviously, if our business improves and if these trend lines continue, maybe that'll even be a little better.

And that gives us the ability to do more.

Obviously, we're still sitting on a significant amount of cash.

As the capital markets loosen up, if there's ways for us to do revolvers and the kinds of financings that we traditionally have been able to do, that may allow the opportunity to use some of our existing cash for other purposes.

So we feel like we've got a number of different ways that we can take advantage, to the extent that opportunity affords itself, to continue to de-leverage.

And we'll look at that.

Okay.

So you're not -- I know you've always been very comfortable with the leverage model.

And a lot of investors are more cautious around that.

You're not necessarily sticking with that model if you can get better rates to pay it down?

Listen, I am -- I've said this a thousand times.

I am very comfortable with this very flexible financing that gives us a very long runway.

I am absolutely comfortable with where we are.

And if we didn't buy back another dollar of debt, I'd still be very comfortable, based on how the financing works and based on the trend lines and projections we have for the business.

But one of our primary goals here is to make sure that the way we take full advantage of this rather magnificent piece of financing is to make sure we get every last day out of it.

And the way to get that last two years, without having to ask permission, just to be able to automatically extend it, is a particular debt service coverage ratio threshold.

And we want to make sure we hit that.

So we have a corporate focus on that.

And there's two ways to get there -- the numerator and the denominator.

And we're going to work on both.

We're going to continue to work on increasing her EBITDA.

And when we get an opportunity in a real tax-efficient way to claw back some of that debt, we'll probably take a hard look at it.

Right.

And then just a question on the new lower-priced products -- and you've become famous for it personally, I guess, in terms of their use to drive traffic.

Just wondering whether you can quantify any or all or give some color around the success of the sandwich?

Any kind of volume numbers -- the $5 pizza?

Obviously, the pasta's very new.

But whether you can quantify in terms of the average check the traffic is driving, the mix towards them, the lunch percentage of business?

Anything to put numbers around that.

First of all, I haven't become famous.

I'm just a bad actor.

But when the agency said that they couldn't get Tom Cruise to play the CEO of Domino's, I decided I better do it.

The more important question is simply that the price points that we're able to roll out that give us the flexibility of participating at the lunch day part certainly add to our menu variety at the dinner day part, and, interestingly enough, give us more flexibility to market to the late night day part.

We're finding its got -- there's a lot of gold in them there hills.

It's just a terrific opening for us of some new channels and some new customers.

And so, sandwiches today -- and as that platform continues to expand, the same thing with our BreadBowl pastas -- these are platforms that provide us great lunch entree opportunities, as well other occasions.

And it's removing, in some cases, the pizza veto when the household's trying to decide what they want for dinner if everybody doesn't want pizza.

Now we've got other options for main meal choices that seem to resonate with a lot of folks.

So we feel the strategy is working exactly the way we envisioned it.

We're very pleased, as are our franchisees.

And I think you see it showing up in our financials.

Any metrics around the sales of the mix or anything along those lines?

I hate to give our competitors too much in a public forum, other than to say that the mix that we're experiencing with sandwiches is, frankly, higher than what I would have guessed it to be, and certainly exceeding our expectations.

And we haven't even totally filled out that line in terms of all the things that we're excited about.

So I feel really good about that one.

BreadBowl Pasta is way too early.

We just really got on TV and began the launch.

We're doing a lot of sampling.

So it's too early to tell.

The Legends line, during the promotional window we got a lot of sampling, probably the most positive consumer feedback we've ever gotten on any launch in terms of the quality and the likeability of that product.

It was really tremendous.

So we really are pleased so far with the innovation, the impact they're having on our business, the way they're rounding out our menu.

And we're committed to continue to drive all of them.

Great.

Thank you very much.

Your next question comes from John Glass with Morgan Stanley.

Hi.

I wanted to -- a couple of questions -- one is on the sales improvement that you saw, particularly in the franchisees.

There's about -- I know you don't look at it sequentially, but there's a 400 basis point sequential improvement.

And if you think about it in terms of the drivers, what do you -- how would you rank order them?

In other words, was it the products?

Was it the lower-tier franchisees getting a lot better and that was the driver?

Is there a way to parse out maybe the contributors to the 400 basis point improvement?

You know, John, that's a great question.

And if there were -- if there was one lever to pull, we'd have pulled it a long time ago.

I mean, it's the most honest answer I can give you is it's no one thing.

It's a series of a number of things that you've mentioned and a number of other things.

We worked really hard.

You know, we've worked hard on pricing and trying to educate our franchisees better and get some pricing problems solved.

We've really worked hard on training and upgrading our franchise system.

And some of the learning that's being exported as a result of these training programs has just been -- it's really been transformational.

The fact that we've booted out a bunch of bad performers who were not actively involved in their businesses, I think it not only weeded out our system of some bad eggs that weren't pulling their weight and were ultimately dragging down the system.

But moreover, it helped send us a signal to some people who were trying to decide whether they wanted to stay on point and energize.

And I think that whole activity helped a lot.

I think our franchisees have really responded well and positively to the challenge of new products and new platforms.

We were just talking about it yesterday.

Two or three years ago, you could go into one of our stores, and if you knew how to make pizza, if you knew how to hand-stretch a dough ball and you knew how to stand in front of the make line and put the right toppings on, from an execution standpoint, that was the guts of the business.

Now you've got to know how to make sandwiches.

And you've got to know how to make Legends.

And you need to know how to make BreadBowl Pasta.

And you need to -- and you need to deal with far more SKUs and far more operational challenges in the stores.

And I actually think that that's had a positive impact on our franchisees.

It's a challenge.

And it's new.

And for some of them that kind of got into the rut of same old, same old, I actually think that these innovations have really kind of driven excitement and reconnected them with the issues that they need to be managing in their stores.

So a lot of different things going on.

And no one of them can I characterize as being the gold -- the silver bullet.

But I can tell you that in combination, a lot of these things that we've been working on I think are really manifesting themselves in measurable results.

Okay.

And then on the Bailout Campaign that you ran, it strikes me that you were able to capitalize very quickly on a topical issue, which is different from kind of the lead times maybe you may have required in the past.

So is that true?

Have you changed the way you're going to market and leaving space open on the marketing calendar to be more tactical in that regard?

Yeah, absolutely.

We -- being nimble and moving fast, and one of the reasons I mentioned our franchisee relations are stronger right now than I can remember.

And they've always been good.

One of the things that's required to be nimble in this business is for everybody to be able to change direction quickly, and having an open mind to do that.

And so when the nation was preoccupied with bailouts, and a lot of average citizens were sitting there with their homes -- their home mortgages under water and worried about their jobs and reading in the paper everyday about everybody going to Washington and getting bailouts, our very -- our very creative team sat down and said, how can we speak to those people and give them something that's going to make them feel good and attract them to Domino's Pizza?

And so the Super Bailout Promotion became a very creative way of responding to, as you say, a very short-term opportunity.

And we're going to continue to exercise that flexibility.

And we're going to continue to move fast.

We're going to market faster with innovations and creativity than we ever have.

And then just finally, on the debt repayment or the debt repurchase, how plentiful are these opportunities?

I understand it's less the market and more of a negotiated transaction.

And I suspect that the better you do, the less arbitrage there's going to be.

Right?

That the rate of the price of your debt's going to converge closer to the face value.

Do you have any view on that, how quickly that happens?

Or is there still a lot of sellers who are willing to sell at a steep discount?

You know, I don't think there's a lot of sellers, because I think what's going on behind the scenes of the debt markets and how people are managing their portfolios and how we fare versus other companies and their portfolios and how they view our leverage ratio versus others' leverage ratios -- there's a lot of noise out there.

And frankly I'm not smart enough to know what prompts people to want to sell and when they want to sell.

Certainly, as our business situation continues to improve, we may not be able to buy $0.48 bonds.

But we don't have to buy them at $0.48 for it to be a good trade.

Having said that, we're also in a position where we can be very selective.

Because we're not out there with an unlimited amount of resources looking to buy bonds from all comers.

So we're actively engaged in discussions with people who come to us and say they have a seller.

And we're happy to negotiate.

And if we like the deal, great.

And if we don't, we'll wait for the next one.

Well, thanks very much.

Your next question comes from John Ivankoe with JPMorgan.

Thanks.

You know, in previous years the pizza industry has oftentimes taken advantage of lower cheese costs and really driven down the price of pizza, if not locally or regionally, even nationally.

I mean, if you could, talk about the competitive market with the national chains and even the independent chains, and whether you see signs of irrationality or whether maybe the last couple of years of poor results generally across the category might create more collaboration, if I can use that word, across the space.

And finally, do you think the pizza industry focusing on more than pizzas now by definition precludes heavy discounting, which has previously just hurt everybody?

Yeah, I think to a degree you've answered your own question, Joe.

I mean, you're being perceptive.

The situation the category's in is we've been a category that's been lethargic, to say the least, in terms of traffic growth.

And so we can stubbornly just keep trying to sell pizza with different toppings.

Or we can try to broaden the audience by broadening the menu.

And I think we're all trying to find our own places in terms of how we're doing that.

But I can report to you definitively that Domino's Pizza in the first quarter of 2009 had positive traffic.

We grew the number of customers that came through our stores.

And that hasn't happened a lot in the past few years.

It's been a very choppy, flattish-trending, negative traffic situation for everybody in the business.

And so we're encouraged.

And we believe that these innovations are really providing us terrific opportunities to bring new people in and grow traffic, which is what every retailer needs to build upon that momentum.

As it relates to food costs, I actually think that the fact that cheese is down so low is not going to have the same impact as it has in times past where everybody goes, gee, our 40% cost item is down really low.

Let's go gut our pricing.

Because if you look at what's going on, or at least where corrugated is, where meats are, particularly chicken -- if you kind of look at how the other compensating aspects of the cost structure are behaving, it really isn't like happy days are here again.

Costs are low.

Let's go be crazy with pricing.

So we're not seeing that.

What we're seeing is everybody is trying to come up with ways to provide what I would characterize as profitable value -- not irrational value, but profitable value.

And I'll give you -- our 5-5-5 Promotion is a classic example of that.

You know, we're not in too bad of shape from a profitability standpoint selling a ticket that starts out at $15 to a customer.

Because all we have to do is up-sell one item, and suddenly we've got a ticket -- an average ticket that's higher than the norm.

And one-topping pizzas, we can try to get a second or a third topping on those pizzas.

We get a side dish.

We get a 2-liter of Coke.

And pretty soon, we've built a very, very nice ticket that we can deliver in a very profitable way.

And so I think those of us who are smart at what we're doing in this environment are shouting value to the customer without doing it necessarily at the expense of margin.

And that's what we're going to try to continue to do.

Thanks, very helpful.

Your next question comes from Greg Badishkanian with Citi.

Thanks.

Two questions -- first, just with commodities, just assuming that they stay stable in terms of pricing just with all of your contracts on different products, especially like chicken things like that that haven't come down like dairy.

When would you expect to see the biggest benefit?

Would that be sort of third or fourth quarter?

That's a tough one.

You know, cheese has drifted down pretty substantially in the last week or two from where it was kind of at its peak in the first quarter.

I don't know if that's a short-term bump or a long-term reset of the price.

Chicken I think is one of those things -- it's one of those many commodities that as the price gets too high, there's probably going to be some down pressure.

We have some price protection.

But at some point in some of these areas and other areas, there's escalators built in based on pegging to commodity costs.

Corrugated -- we hear that that's a market that's starting to soften and that those prices could be coming down.

But we haven't seen that yet.

We're looking at every element of the basket.

And if the question is, is there upside leverage as we move through the year in certain scenarios?

Yeah, there is.

Is there probably more down pressure on commodities than up pressure as we continue to wade our way through this horrible recession?

Probably.

But I'm one guy that has one opinion.

I can't base that on anything other than the trend lines I see and kind of the situation that we're in, and maybe a little bit of hoping.

That is good color.

Thanks.

And then just moving to the oven-baked sandwiches -- very successful, obviously helping to turn around your comps.

Have you noticed anything as sort of time has progressed with that in terms of you get trial and then be bold -- reorders?

Has that sort of stabilized?

Or has it continued to sort of accelerate as more people try it and you build up a customer base on that?

Yeah, the data that I'm getting shows that when we get trial on those sandwiches, people really love them.

I mean, there was a reason we had a two-to-one preference over Subway.

They're just better.

They're good.

And so our operators are finding that if they can get that sandwich in the mouth of our customers, they're going to get orders.

And they're going to get repeat orders.

We're struck by the loyalty of sandwich consumers, particularly at the lunch day part.

It seems like people fall into a pattern of behavior.

And they're willing to buy sandwiches day after day after day.

And the only thing they want is variety.

They're happy to buy a Domino's sandwich three, four or five times a week.

But what we see is at some point in time they just want to shift from this one to that one.

So we think the big opportunity for us is to continue to look at line extensions and expanding that category.

Because the more -- it would appear as a category, the more offerings you have, the more flexibility you provide that customer, the more willing they are to buy on more of a repeat basis.

So we love being in that category.

We're going to be a bigger and bigger player.

And I think we've got a strategy that's going to help drive more and more trial and more and more loyal customers.

Thank you.

Your next question comes from Colin Guheen with Cowen.

Hi.

Thank you.

First question, just dovetailing on the day part expansion strategies.

Can you just give us an update on maybe -- your store marketing and merchandising initiatives have been kicked around over the last couple years, and how this might -- or how this impacted day part mix?

Well, I think the biggest innovation in terms of marketing and communication with customers over the last couple years has been the Internet and how successful we've been at using that as a channel to communicate with not only our existing customers, but prospective customers.

A long -- for a long time, the battle that we faced, as hard as we tried otherwise, was people would call us and order, and they really didn't have a menu in front of them.

They might have a flier that featured a particular product.

Or they might just be calling because they had the magnet on their refrigerator.

But they always ordered what they always ordered, because they weren't staring at a menu.

It's one of the few ordering opportunities for food where you don't have a menu in front of you.

And we think that was limiting.

Because oftentimes, people didn't realize we had different cross types and different varieties, and maybe even different platforms that they could choose from.

The Internet has provided us the ability to every easily and efficiently make sure that there is a menu in front of our customers.

And they see the breadth and the depth of the menu in terms of all the topping choices and all the crust types, and now all the various platforms that they can choose from.

And that seems to be a very powerful part of what's really driving the business.

And then obviously, once we communicate -- once we establish that Internet communication, we can go back to it.

We can use it.

We can promote through it.

And we've just found it to be a very, very successful new innovation for how we can do what we do and do it well.

But we also are really selling hard the notion of local store marketing.

We've got a lot of tools in our toolkit that we're providing our franchisees as to ways they can connect with their community.

We're doing a lot of business with hotels and motels and things that I would consider to be nontraditional channels if you look back three and five years ago.

And we're getting a lot of success out of those initiatives as well.

So it's no one thing.

But it's certainly -- it's certainly a set of marketing principles and initiatives that we feel in combination are doing a good job for us.

Yeah.

I just wanted to hone in, too, on some of the merchandising initiatives that I think we've seen in some of the analysts' days.

Are those kind of still in the mix, to be ruled out or still in test?

Just kind of an update on those that might drive an occasion in the afternoon if somebody's coming in waiting for a sandwich or get carry-out during the snack or lunch day part.

Yeah, without going too deep into kind of some things we're working on, as we bring more traffic into the four walls of our stores -- even though we don't intend to change the footprint and add tables and have dine-in experience -- but as we bring more people in, there's more opportunities for both sampling and impulse sales.

And for us, impulse sales are everything from Coca-Cola to chips with your sandwich to side items.

And once we've got you there in the store and you're hungry -- because if you weren't hungry, you wouldn't be there -- it's a great opportunity to sample, which we're going to do more and more of.

It's a terrific business in that it's not a real expensive marketing tactic to cut a sandwich in thirds and give somebody just a taste of a great oven-baked sandwich.

So we're doing a lot in that regard that we think -- we think will have a great benefit over the long haul.

And is that underway or being rolled out?

Or is it more in test still?

Or kind of just what inning are you in with those type of initiatives?

I'd say we're in the third inning.

Okay.

Because some of that requires equipment.

And some of that requires design.

And some of it requires training.

So we're early stage with that.

Okay.

And then just lastly, just around the YouTube incident, should we be baking in a little bit of something in the comp hitting here in the second quarter around that?

Or was it -- is there any comment in that regard?

I want to make sure I understand your question.

Is there -- is there any -- is there any negative comp impact that sequentially we might want to put into our models because of that in the first -- in the last couple weeks that could be material?

Oh, because of the YouTube thing?

Yeah, because of YouTube.

Well, first of all, as hard as you try, you'll never get me to give you guidance on a comp or talk anything going on in the future.

So it was a very creative way to get there.

I believe that whatever -- to whatever extent this incident has shaken some confidence and created some negative buzz in the short term on the Internet, I personally believe that that's short-lived.

And the data that we're looking at -- and we follow the social media on a daily basis.

We actually get a sweep every morning of what's being said and what's positive and what's negative and how it's impacting our overall brand image.

I can tell you that all of our evidence leads us to believe that we've already returned to what is pretty close to a normal score in all those areas.

So as I sit here today, I don't believe, and I don't want to believe that that incident is going to have any kind of a lasting impact on our sales or on our progress going forward.

Beyond that, I refuse to predict the future.

Okay.

Thank you very much.

You're most welcome.

I'm being told we have to wrap things up because we've exceeded our hour.

So if it's okay, Madam Operator, I'd like to -- I'm going to thank all of you for being on the call and letting you know that we obviously feel we're executing against our 2009 plan successfully.

And there is a renewed spirit here regardless of some short-term frustrations with things we couldn't control.

There's a lot of positive energy building at our Company.

And we're feeling like we're assuming our position -- our rightful position as the leader in the pizza delivery category in every way it can be measured.

And we're going to continue to drive that through the support and cooperation of our franchisees, our team members, both domestic and international.

And we're going to hopefully continue to make good things happen.

So thank you very much.

I've enjoyed my time with you today and will look forward to speaking with you in a few months.

Ladies and gentlemen, this does conclude today's conference call.

Thank you for your participation.

You may now disconnect.