達美樂 (DPZ) 2009 Q2 法說會逐字稿

Good morning.

I will be your conference operator today.

At this time, I would like to welcome everyone to the 2009 second quarter conference 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).

I would like to introduce our host for today's call Ms.

Lynn Liddle, Executive Vice President of Communications and Investor Relations.

Please go ahead ma'am.

Thanks, Casey, and everyone, for joining us this morning.

With us today are Wendy Beck our Chief Financial Officer and David Brandon, Chairman and CEO and they will both be making some comments, we will follow with Q&A.

Before we begin, a couple of points I'd like to make this morning there was an inaccurate wire report written about us.

I want to make sure I clarify the record for everyone.

They reported $0.16 in EPS and we in fact had $0.21 in EPS as adjusted.

I wanted to make sure everyone has that information correctly.

We think that erroneous report may have led to others and caused confusion in the market this morning.

Additionally, I will turn your attention to the Safe Harbor statement.

In the event that forward-looking statements are made and I will ask the reporters on the line to be in a listen-only mode.

So with that, I'd like to turn it over to our Chief Financial Officer Wendy Beck.

Thanks Lynn and good morning everyone.

We are overall pleased with our results and I'm happy to run you through the results for the quarter, then I will turn it over to Dave who will give you more color.

Turning to results for the quarter let's start with the top line.

Our global retail sales were down 4.7% for the second quarter resulting from the negative impact of foreign currency and lower domestic same-store sales.

However, excluding impact of foreign currency our global retail sales grew 3.8% during the second quarter.

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

Looking at those individuals components, our domestic same-store sales were slightly negative down 0.7% for the quarter versus the second quarter of 2008.

Franchise same-store sales were down 0.4%, company-owned stores were down 3.3%.

As Dave will touch upon later in the call our domestic stores were negatively impacted by an unfortunate viral video incident within the quarter.

As anticipated we had additional domestic store closures during the second quarter closing net 20 stores.

This closure reflect both continued economic challenges as well as our efforts to strengthen and improve our franchise base over the long-term.

International same-store sales were positive 4.1% on a constant dollar basis marking a 60 second consecutive quarter or over 15 straight years of international quarterly same-store sales growth.

Additionally, our international division grew by a net 164 stores in the quarter, which includes 90 new stores in Spain that Dave will discuss in a moment.

As a result of this top line performance our total revenues for the second quarter were 316.6 million a 17.7million, or 5.3% decrease from prior year, that is due primarily to the impact of the store divestitures in 2008.

Lower cheese prices on our domestic supply chain revenues, and lower international revenues driven by the negative impact of foreign currency.

Breaking down the decrease.

Our company-owned store revenues declined 8.3 million, or 9.7%, the majority of which was due to having fewer stores as a result of the 2008 store divestitures and to a lesser extent lower same-store sales.

Domestic supply chain revenues decreased approximately 7.1 million, or 3.9%.

Lower cheese prices hurt our supply chain revenues but do no impact our supply chain dollar margins; however, these lower cheese prices benefit our domestic store unit economics.

The decrease in cheese prices was partially offset by increases in non-cheese commodities such as boxes and chicken during the second quarter.

International revenues declined 2.3 million or 6.8% due to the negative impact from foreign currency partially offset by higher same-store sales and store count growth.

As mentioned, on both year end and first quarter calls, we anticipated a negative impact from foreign currency throughout fiscal 2009.

This did negatively impact our royalty revenues by approximately 3.2 million in the second quarter.

Foreign currency also negatively impacted international supply chain revenue by 1.4 million.

These declines in international revenues were offset by approximately 2.3 million, of revenue improvements, primarily due to higher same-store sales and increased store count.

Moving on to our operating margin our consolidated operating margin as a percentage of revenue increased 0.9% in the second quarter versus the prior year period.

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

The increase in our consolidated operating margin was mainly caused by the impact of lower cheese prices.

Our supply chain margin increased 0.6% from the prior year quarter.

This increase was due to lower cheese prices in the quarter that had no impact on dollar margins.

The average cheese block price in the second quarter was $1.20 per pound versus $1.91 last year or 37.2% decrease.

Offsetting these supply chain margin increases was the impact of higher non-cheese commodity prices such as chicken and boxes.

Our company-owned store operating margin increased 0.3% from the prior year period.

Lower food and delivery cost accounted for a majority of the margin increase.

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

Offsetting these lower cost were higher labor expenses in the quarter resulting primarily from last summer's minimum wage rate increases.

As a reminder, we will be impacted by another round of Federal Minimal Wage increases at the end of this week as the third success of annual increase takes affect.

Turning to G&A expenses, G&A increased 11.5 million in the quarter versus the prior year.

So breaking down the increase, 6.9 million of the increase was from gains recorded in the second quarter of 2008, related to the sale of 27 stores, while 4.9 million of the increase was due to stock compensation expense and professional fees recorded in the quarter, as a result of our stock option plan changes.

As previously announced, we implemented a stock option exchange program during the second quarter.

Which resulted in incremental stock comp expense of approximately 1 million pretax.

Separately, and also as previously announced we amended stock option agreements to include a retirement provision resulting in 3.7 million pretax of stock comp expense of which we were required to accelerate approximately 3.4 million, pretax of existing expense, during the quarter, which is in line with our first quarter disclosure.

Offsetting these increases in G&A was 2 million of net proceeds received in the second quarter for our insurance settlement related to the viral video incident that Dave will discuss in more detail.

Excluding items I just mentioned, G&A increased 1.7 million versus the prior year quarter due primarily to an increase in our labor cost resulting from additional bonus expense recorded during the second quarter 2009, versus the second quarter of 2008, as a result of us not meeting our performance related targets in 2008.

Also, we saw the affect of merit increases and investments we made in our new franchise audit and training team in G&A during the second quarter of 2009.

So our G&A expenses for the second quarter excluding the nonrecurring items just mentioned, is fairly indicative of our anticipated run rate for G&A for the remainder of this year.

On the income statement you will also note that we had a 12.9 million gain on extinguishment of debt which I will discuss further in a moment.

As for our income taxes we recorded 2.2 million of tax reserves related to certain state income tax matters, this increased our affective rate 46.8% for the quarter and is also outlined in the items affecting comparability table in the earnings release; however, as previously indicated we currently anticipate approximately a 40% normalized rate of foreseeable future.

Next, let's look at our bottom line earnings.

Our second quarter diluted EPS as a reported on a GAAP basis was $0.25 or $0.21 when adjusted for items affecting comparability.

The $0.21 as adjusted EPS figure is a $0.01 decrease from the $0.22 in 2008.

Foreign currency negatively impacted us by $0.03, and our improved operating results primarily from our international and supply chain segments, benefited us by $0.02 in the quarter.

Now, let's look at our balance sheet.

In the second quarter we repurchased at a discount 25 million of principal on our senior notes for a pretax gain of 12.9 million in the quarter.

Subsequent to the quarter, we repurchased an additional 20 million of principal on the senior notes for pretax gain of 4.6 million in the third quarter.

Year to date, including our third quarter purchase, we have now repurchased 88.3 million of principal on our senior notes for 49.6 million, resulting in 38.7 million of pretax gains.

Subsequent to the quarter, we entered into a new 50 million letter of credit facility.

We are in the process of moving our existing letters of credit from the variable funding note facility or our BFN to the new facility.

This will allow us to draw down the BFN completely and to date we have borrowed an additional 35 million subsequent to the quarter.

Given the uncertainty in the financial markets we felt it was prudent to maintain and control as much liquidity as possible, as at a low variable interest rate that approximated 1.8% in the second quarter.

So looking at where we stand currently with our letter of credits, we now have 33.5 million outstanding letters of credit under the new facility.

We continue to generate strong free cash flow which feeds our robust cash position ending the quarter with 61.7 million of unrestricted cash.

In closing, we believe that during these uncertain times we continue to maintain a strong cash position while demonstrating that we will opportunistically deploy our cash in manner that drives shareholder value.

We are satisfied by our overall results, especially in light of both the economic and internal challenges within the quarter.

As we have continued to show we have a proven business model that is resilient even during these challenging times.

This concludes our financial update.

Now I will turn the call over to Dave.

Thanks Wendy, good morning everyone.

I would like to begin by saying I'm pleased with how we fared in the second quarter.

I want to remind you all why we love our business model and why we think we are well positioned during this challenging economic environment.

During these times of uncertainty and volatility our shareholders benefit from a number of factors.

Which include the fact that we are primarily franchise and that we can bundle the Entrepreneurial energy, investment and passion of our dedicated franchisees.

We have very steady and predictable cash flows.

We have a unique capital structure that provides a lot of flexibility for years into the future.

We believe we have a very sound tragic plan with very important growth initiatives that continue to show great promise.

Thankfully all this helps us weather the current economic storm much better than most brands and companies will, despite the fact we had to endure an unfortunate incident early in the quarter that killed our momentum for a couple of weeks, we saw an overall continuation of much of our positive momentum from the first quarter and held steady on many trends that indicate that we are continuing to lead in our category.

I'm proud to outline some of those but first I will start with my final comments and I mean final comments regarding the bad news event that took place during the quarter and thankfully now behind us.

But it did have an impact on our domestic sales comparison so it needs to be included this briefing.

You likely heard about the shout heard round the world that we experienced when two now ex-team members of a domino's franchisee who had a seriously warped sense of humor decided one day to pull a hairbrain prank in a store.

They inappropriately handled the food in some fairly disgusting ways and posted it on YouTube and it went viral everywhere.

We took quick and decisive action.

With the help of some online customers we identified the culprits, the franchisee fired them immediately and they are being prosecuted.

We set the record straight for our customers and we moved on as quickly as possible.

Unfortunately we experienced the short-term hit to sales primarily in the weeks following the incident that we estimate costs us between 1 and 2 percentage points in domestic same-store sales for the quarter.

While this impeded our second quarter same-store sales progress, we think we are past this unfortunate event and believe it will not have a lasting negative impact on the overall image of our brand.

I'm pleased to report that we did have business interruption insurance in place, and as Wendy has already told you we were able to negotiate a net settlement with our insurance provider of $2 million.

Which clearly has a eliminated any short-term negative financial impact of this problem for our shareholders.

The other bad news that we have to talk about is no surprise to anyone, it's what we talking about and wading through every day in the retail sector and in our overall economy.

And that is we have anemic economy and a consumer that is nervous, some may say that the consumer is in panic mode and they're very reluctant to open their pocketbooks.

They continue to witness rising unemployment, concerns over their under water mortgages, the whole credit card debt issues, failing industries and companies, volatile gas prices and threats of tax increases, all of the unrested uncertainty in the world all manifesting itself as it relates to Domino's Pizza in an overall retail sector that is at best limping along.

Consumers are looking for value or better said they're obsessed with value in this environment.

A sluggish quick service restaurant industry particularly in the recent past and the pizza and diner day part segment is being hit as hard or harder than any other segment that we study.

Watching all the industry news, it appears as the early predictions of a second half recovery may have been a bit optimistic, and that flat sales maybe the new up 5% for a while, based on the way the economy is performing .

So in this context we feel pretty good about our previously stated forecast of 2009 being flat sales years for Dominos and as I mentioned earlier, we have been able to put several of our initiatives in the win column, that makes us feel good.

Grateful to be leading our category, encouraged from where we can go from here and of course, knowing that we have to continue to work hard and smart as a system to keep things going.

Now during the second quarter we executed against our strategies of barbell price points for every customer and menu expansion with our big taste bail out promotion and the rollout of bread bowl pasta.

Both promotions performed well and achieved important traffic gains, in fact I'm please to report that we now experienced our second consecutive quarter of positive traffic growth for Dominos Pizza.

That was a very important goal as we is it out the plan for a year, we are proud of that and want to keep it going.

Additionally, bread bowl pasta has added yet another product platform to our brand which we can continue to build upon.

And out lunch business continues to grow and thrive giving us great incremental lift.

Notable, without product and day part expansion our results would not have been nearly as positive as they have been this year, we feel good about the direction we are headed with our menu management.

Proof that our execution is making a difference is a recent win for us, we were ranked number one in the fast food segment in the American Consumer Satisfaction Index.

And as you know this is an important measure of customer satisfaction it gets a lot of visibility across the country every year.

We had one of our competitors who made a big deal about this every year they have been proud of their position and not as vocal this year because we took over as number one.

The consumers rated us higher than anyone in the pizza category and we were higher than all of the major players in the fast food industry as a whole.

We are now the overall most improved since the survey began.

We improved our first year score by nearly 15%, which is huge.

Additionally the most recent MPD Crest Market Share report ranks us Number One in online sales with a 28% share of that market, ahead of both Papa Johns and Pizza Hut.

This is up from 11% share just 24 months ago.

Our push-to-drive technological leadership is a important part of increasing our market share and provides consumers with lots of ordering options, which helps our top line sales and helps our store profits.

Our franchisees remain engaged and aligned with strategies, they've been executing well and continue to outperform corporate stores again this quarter in sales, which obviously we want to do better and better with our corporate stores, but the fact that our franchisees are leading the way is a important thing for our business model and overall success of our brand.

We recently held our Worldwide Rally for our franchisees in Las Vegas, and it served as a great opportunity to keep moral high and relationships strong.

Recent improvements in our supply chain profits have also led to improved profit sharing payments which helps improve unit economics for our franchisees.

We have even featured some of our franchisees in our ad campaign for Dominos American Legends Pizza.

Since our franchisees are really the heart of our business and they really were the inspiration for each one of the pizzas in our American Legends line we decided to include them in our consumer messaging.

Now turning to another important element of our business the cost environment, it continues to favorable, with cheese close to record lows and with the rest of the food basket only slightly higher than a year ago; however, as Wendy mentioned there is another increase this month in the Federal Minimum Wage which will impact our corporate stores and to a certain degree our franchisees profitability as it has over the past few years.

The company will continue to invest this year and make targeted G&A investments in our franchisees and team members.

As you heard before we are doing that through training and motivational programs, holding even accountable but also offering rewards and incentives to reinforce positive behavior and results.

These costs will continue to show up in a higher G&A year-over-year as Wendy has already discussed.

One division that continues to see great success is our international group, we are very proud of them.

They've had robust sales comps and store growth again, last quarter we announced the opening of Spain, we are pleased to report we have 90 Dominos Pizza stores open and running, which adds a new European country to our footprint and we are very proud of what we accomplished in a short period of time.

This presence in Spain will not have a material impact on our 2009 earnings.

But our international team did a great job in getting this market open and it's going to mean big things for us in the years to come.

Another important factor of international success, particularly in today's economic environment is that this business remains a low risk model for us with no significant capital investment spend.

We believe that our sustained profit results are proof that the master franchise model is the right one for us internationally.

Now we have reinforced again and again that Domino's is a strong cash flow generator over the course of the year.

We continue to generate about $1 million a week in free cash flow.

We use that cash in opportunistic ways to benefit our shareholders.

We recently deployed cash towards debt reduction taking advantage of both the favorable tax treatment and attractive prices on our debt.

We will continue to do this opportunistically.

Our CapEx investments remain lower than most any company our size and scope.

We will continue to show great discipline around this spending with every investment requiring either a very short pay back, or a very long-term important positive business building opportunity for the company.

With that, I will pause and Wendy and I will open things up for your

(Operator Instructions).

Our first question will come from Greg Badishkanian with Citigroup.

Just a question few questions on same-store sales and if I think you had a 1 to 2% impact from the video.

Would you say same-store sales are running in the positive range at this point?

Yes, if we were to take away the impact which was abrupt and measurable of that incident we would have completed the quarter positive somewhere between a point to two points.

Pretty encouraging.

A continuation of the momentum we felt in the Q1.

The fact we were able to collect on the insurance payment, we think although we would have loved to have a positive number and wish it never would have happened it lessened the blow in terms of impact it had on the financial results of the quarter.

And also just talking a little bit initiatives, oven baked sandwiches, pasta, if you can kind of let us know in terms of what you -- hoe they have been performing relative to expectations, and anything new in the horizon that you can share with us knowing that your competitors are listening to this as well.

Thanks for referencing that.

Listen, it was only a couple of years ago when if you were put in football, (inaudible) we had a play book with one play in it, it was pizza.

What is really interesting and fun and exciting about where we sit is that we carefully described what we are doing as a platforms.

We have a sandwich platform, pasta platform, brand new high-end pizza platform.

The reason the platform is appropriate is because we can build upon what we already have.

Opens up a whole new realm in terms of flavors and varieties, line extensions, the kind of things that give us the chance to not only expands our menu but create more news.

So that these things are not one time events.

I think what where you should look for from us is to continue to build upon all of these very proven platforms we have driven the mix of each of one of them well in to the double-digits and prove we have a lot of people out there who are interested in these products, who enjoy them and we can build upon that as we move forward.

We are pleased.

Thank you very much.

Our next question comes from the Joe Buckley with Bank of America, Merrill Lynch.

Can you talk about the company's store performance versus franchise performance and why the disparity was so great?

Two factors Joe, one is our franchisees are getting better.

The training programs that we are putting them through, the fact that we weeded out the F franchisees, the fact that we put a new OER system in place, which raises the bar in terms of accountability of operational performance.

Our franchisees are running a tougher race than they were before and that's a good thing and we feel good about that.

As it relates to Team USA, our Team USA has pocketed investments and a portfolio of stores located in Pacific markets.

We don't have the ability to homogenize the whole United States in terms of results.

We kind of live on the basis of how certain markets are performing.

And without going in to a lot of detail, when you have a significant corporate store presence in Las Vegas Nevada, in southern Florida, and Phoenix Arizona, you start to see that we've got very material assets of our corporate store business located in some of the hardest hit areas of the economy.

And so unfortunately they are in a situation where I love the results they are achieving in certain markets, but overall average is being negatively impacted by what I would call some disproportionate negatives in some of the other markets.

We are going to have to slog through that and working with marketing and operations to do better, but without question our Team USA unit is flying in to some significant head winds in some of these markets that have really been impacted morally in the real estate area.

Okay.

Then you mentioned the second consecutive quarter of traffic being up, could you apprise details on what the traffic check mix might have been and what is causing the pressure on check.

I imagine it's the mix as you introduce the sandwiches and pasta, curious if you are seeing competitive pressures on check most recently.

This is an area where we tiptoe, we are not looking to give away anything that will be helpful to us.

I think your overall assumption for the quarter is we did have positive traffic so our new product platforms continue to bring in new customers and open up a new realm for us in terms of new interaction with new potential long-term customers.

And we like that.

Obviously, we ran a very high value promotion during the quarter, in terms of the bail out promotion, at the same time some of our new products offer lower price points for different day parts and so that's going to have a pressure on ticket.

And make no mistake about it if the stupid incident down in North Carolina wouldn't have happened, we would be here reporting significant traffic up tick, and whatever happened with the ticket it would not have been enough to offset another positive quarter when everybody else is reporting some pretty significant negatives, so all in all we think it fits together well and we like the way we with balancing traffic and ticket to grow the business.

Just on the Youtube incident, sounds from what you said that your comfortable with the insurance proceeds, so we shouldn't think that EPS would have been higher, that same-store sales would have been higher if the incident had not occurred.

Yes, I mean, certainly if we have a couple of weeks where we have significant downturn in sales that affects royalty streams and dough ball sales, it affects the profitability of the business.

It was very short lived, I think the insurance company recognized we had certainly experienced some negative financial impacts of this, they were interested in doing a quick settlement.

We agreed with that strategy because we want to move on and that's the way it happened.

But a $2 million injection into the quarter, I would safely say covers any of the negatives associated with that incident.

Okay.

Thank you.

Our next question comes from Jeff Bernstein with Barclays Capital.

Great, thank you.

Couple of questions, one on the US comp again, excluding the Youtube sounds like you said you would have been system wide comp, maybe up 1% or so, but then you did mention that the macros presumably got tougher with my tick.

If you remove the Youtube then go into the second quarter you are cautiously optimistic, would you say trends got worse because of the macros or pleased with sequential improvement throughout the quarter ex-the incident.

We keep a quarterly score card in terms of reporting to you and if it with weren't for the incident we would be reporting a 1 to 2% positive domestic same-store sales performance and we already had one of our major national competitors reported their results and we feel good about how we fair against that one and there is another one yet to come and we don't know what they are going to report.

But we think it was a strong quarter for Domino's Pizza considering all the factors.

We don't get in to month to month sales reporting and we are not going to because there are too many things that can influence it.

My take over all of the economy is there is a very jittery consumer out there that is behaving in a difficult way to predict.

So you're going to have periods of time where you feel like it's getting and times when it feels like it's going to other way, it's going to be choppy, that's what we experienced in the over the last really year.

I don't see that changing for the next couple of quarters.

I wish I was smart enough to tell you there was a pattern that had developed that was a afforded more predictability in terms of sales but I don't think it's the case.

Then seems like the second quarter we saw additional debt paydown, nice discount and again in the third quarter.

I'm wondering whether at this point you said it's more opportunistic but could it accelerate in terms of more meaningful paydown on longer-term debt or short-term, smaller buckets but not likely to change the longer-term?

We think it's in everybody's best interest to keep cards close to our vest in terms of what we might do and what we can and what option are available to us.

As it stands today, we have not done capital raising events.

What we done is simply taken the terrific free cash flow, while also maintaining very very adequate, I would say beyond adequate, I would describe them as conservative cash balances.

And then we take free cash flow and opportunistically claw back the debt and we feel like we done it in a smart way and efficient attractive way in terms of price.

Who knows what is is future holds but depending on how much debt is available, what is price is, how our business continues to perform, there is all kinds of options available to us as we move forward to continue to deleverage the company and do it in a way that's accretive to shareholders and we will continue to explore that.

Okay.

Then just lastly, perhaps more for Wendy, but you mentioned a commodity basket, you said cheese, down 37%, but the rest of the basket was up modestly, wondering as you look to the back half of the year, kind of I think you said you thought the basket as a whole would be down mid single-digits.

With the benefits of cheese, -- for the full year in terms of cheese in the combined basket.

Whether we can assume the past two quarters, see meaningful margin expansion, whether it's sustainable on each of the ditch margins that you guys report whether we can see that benefit in the back half continue.

First off I would want to remind you we are rolling over in the third quarter the highest prices we saw in 2008.

Year-over-year you're going to see improvement in third quarter, it hit as high as 221 the cheese block in the third quarter.

We will see that as far as trying to understand where we think commodities are going to go for the latter part of the year, there is lots of speculation that cheese can't stay at the same prices as they are.

We think overall we will see deflation and run better numbers comparatively to the prior year.

Still a down mid single-digit basket, is that still a reasonable number for the basket combined?

We are really reluctant to forecast the future as it relates to commodities we proven how bad we could be at that.

I would say if current trends continue, we should have a better year against year comparison than maybe in the high single-digits.

I say that , based on where cheese is, we are going in to a really really favorable comparison, the third quarter could be a good period for us as it relates to cost comparison and potential for margin

Thank you very much.

I will tell you more about that in about three months.

Look forward to it.

Okay.

Our next question comes from John Ivankoe with JPMorgan.

It's Steve Reese in for John.

One of the things we worry about when cheese prices are at record lows and consumer chasing value, is that the competition starts to get aggressive.

Have you seen this yet, two how you think the brand is positioned with value if things get aggressive on the price points.

Yes.

It's great question.

It's important question.

I would tell you that based on kind of how everybody's unit economic model is performing when their top line is contracting, and thankfully ours isn't contracting as much as others but in this environment where sales are hard to come I really believe that the pressure on operators is such that nobody is interested in just giving away the product to some how make themselves feel better.

I think you can see it in the prosecution mall price points, in the jove all strategies that people are employing out there.

Other than the really, kind of cheap pizza guys, I would characterize them as the guys that don't and kind of the carryout cheap product, cheap price, that's their niche in the market, other than that segment that has always been there and will always be there I see price discipline right now than we seen in a long, long time with cheese prices as low as they are only because there are other factors creating operating pressure that are precluding people from feeling like happy days are here again let's see how low we can drive price to gain share.

It doesn't seem to be happening.

Great, that's helpful on the international side we haven't talked about that, solid but softer based on the one and two year basis.

Maybe talk about if there were markets that softened that impact of the overall comp or color on the international side would be helpful.

You get a look at how our really largest international businesses are performing because our Mexican partner is public as is our UK and Ireland partner.

And our Australian which includes Australia and parts of Europe France, Netherlands and Belgium.

Generally speaking we are in a situation where we have not incurred the same kind of global slowdown they heard so many of my peers talk about.

We seem to persevere pretty well in materials of our same-store sales gains, continuing to open up stores, continuing to open up new markets, so all in all, we still feel very very positive about the way this business is performing.

We are watching it carefully, we hear everybody around us talking about global recessions and slow downs in the global economy.

We don't think we are bullet proof in terms of experiencing that, we watch it period to period and quarter to quarter.

As it stands we feel good about the numbers the way they are coming in.

In the past last year you cooter of embarked on intense operational focus for your franchise system, reallocating stores to stronger franchisees, update us with where you stand to sub-par franchisees verse a year ago and what you are doing to address this, if anything, still.

For several quarters, as we got in to the AB&F kind of classifying of our franchisees, we were in the thick of that program, we actually reported that on a quarterly basis in terms of how that pie chart moved and how many F's exited the system and all those things.

We basically indicated a call or two ago we were going to get out of that business, as you can appreciate for us internally for a CEO to get on a public announcement and talk about how many kids we kicked out of class yesterday is not the most positive energy thing I could be doing.

I'm here to report that we raised the bar substantially to maintain your position as a franchisee at Domino's Pizza

We continue to rank them and communicate where they rank.

We continue to move more B's to A's which is great, more F's to B's we continue to put cig cap pressure on franchisees that are not making the grade and get them to change quickly or move them out, that process is one that is on going and will likely never stop.

At least not under my watch.

We are going the continue to hold the bar really really high.

Beyond that I would like to get out of the specifics of that simply because it's a family business I'm not sure it serve as useful purpose to keep raising the numbers oh than to say we feel good about where we are.

Thank you very much.

You bet.

Our next question comes from Michael Wolleben with Sidoti & Company.

Touching on things that were brought up.

With the positive traffic in the past two quarters, how much of that is attributable to the extended hours that you guys have put in place here domestically?

It's difficult because extended hours were connected with menu changes and so is it sandwiches, extended hours, day part, extended hours, late night, is it bread bowl pasta, we really put a lot out there in terms of changes.

I don't think this is a one trick pony in terms of traffic.

It's a combination of several things we done well.

Certainly getting our stores opened earlier and keeping some of them open later is part of that.

I don't think that in and of itself has been the real factor.

I think it's a lot of what we are feeding them, feeding them better food than what we offered and more variety than what we offered.

With that, as well on the new products, sandwiches and the bread bowl pasta, can you comment on how that traction has held up after the initial sales levels?

Yes, we really don't disclose a lot about mix and those kinds of things I wish I knew that about competitors, all of those over achieved in the national rollouts versus what we experienced in tests.

The mix ramped up as high or higher than what we hoped for.

Terrific trial, repurchase on them has been terrific.

We are glad we are in everyone of those categories.

Not one platform that are even on the watch list in terms of the earning their way or making sense or money for our operators and well received by customers.

Everyone of them is a winner as they currently stand as part of the menu, we will invest further in the platforms in terms of line extensions and variety.

On the debt repurchases, the debt that was done here subsequent to the close of the quarter, looks like it was done at a more expensive price still at a discount, but is that a sign of the market in general changing, if we saw further debt repurchases in the future would you expect them to be closer to those levels or can you comment on that.

Not only will not comment on the future of the cheese market, I have no idea where the debt markets are going other than to say early in the game we were able to buy some tranches of bonds that were phenomenally priced, talking $0.50 or below cost on the dollar.

We didn't run model that will that would continue over any sustained period of time.

As our results continue to improve, and as we continue to assume the leadership position that we always held in the category and as people understand our balance sheet better and they they see less risk and more opportunity we have always believed that we would be repurchasing debt at a higher rate than $0.50 on the dollar.

So the models that we run are as substantially higher levels than that.

And that's what we believe is going to happen.

However, markets swing and we are going to continue to opportunistic and we can be selective in when we do a transaction and when we don't, we will look at each one on their own merit.

Beyond that I can't predict where that price will be going.

There is not a daily public market out there.

It's really very anecdotal it terms of have got a willing seller and we can come up with a price that fits within our model then we maybe a willing buyer.

Okay.

Just lastly here.

We are still seeing some domestic closures on the franchisees side, can you comment on, I guess the financial health of the franchise system here domestically?

We are still putting as I indicated earlier we are putting pressure on people that are not all in.

And that's creating some closings we hope some of those will be temporary as we work on building the franchise of candidates.

Based on our original assumption of how many stores we thought were going to close during the economic environment of 2009 with the pressure that we are putting on our lower end performers, we would have actually forecasted that we would have closed more stores by now.

So we are feeling like really the economic model is improving, our solid franchisees are feeling better about their financial results.

We don't see a lot of financial closures out there as a result of high commodities compressed margins, and good operators that want to close down stores because they don't feel viable.

We are dealing with kind of the clean up of some marginal operators and stores.

We are not going to adjust early in the year we gave you our outlook of what we thought was going to happen with stores we are not going to adjust that right now other than if anything the trend seems to be positive.

We are opening up new stores.

Which we think is really significant and tells you a little bit about the economic model and the prospects for the future.

Nobody knows this business better than the franchisee community and they are out there building new stores and investing in the future in this environment and that says a lot.

Great, thank you.

Our next question comes from Tom Forte with Telsey Advisory Group.

Wondering for you could give, subject has been discussed wanted to know on the capital of your franchise operators have franchise to capital do better performing franchise operators is the bank answering call and giving them the opportunity to buy some of the under performers or the is that environment as difficult as it has been recently.

Maybe if you don't want to comment on mix or on days of week as far as what sales are like Monday to Thursday versus weekends, when you think about the state of the consumer, using some of those as guide posts either mix of purchases or weekdays versus weekends, would you say that the consumer is significantly weaker now than they were earlier this year or about the same?

I will hand it will second part of it first.

The pattern that we were slugging through kind of last year in the back half of last year, was that we were actually feeling pretty good about sales Monday through Thursday and got in to the weekend period where people spend extra money and party a little bit more and where we would have expected to see the bigger volume, that's where we were having same-store comparison problems, people were nesting on the weekend, holding back and not spending as they were during better times.

I don't know how much of what has happened is as a rule result of change in consumer behavior or how much driven by the talented people in marketing department.

We have been doing a lot to address that issue with some of our local promotion activity, some of the things we done with our internet marketing, we really worked hard to bolster the buzz around our brand and the opportunities associated with accessing our brand during those important weekend time periods and we seen a much more level performance and we feel better.

Whether we are getting that right or whether the consumer's acting different than they were, I'm not sure other than I feel better about where we are.

The lunch day part has helped us for sure.

But we are also selling a lot of sandwiches and bread bowl pasta at dinner time.

We know that we've helped our dinner business because we provided more variety, probably lifted the pizza vito a bit with families who wanted more selection, we can now offer it.

I can't point to in one magic bullet it seems to be a combination of a number of smaller bullets.

The first part of your question was -- your first question was?

The ability of the franchise operators to access capital especially the better performers to buy the weaker players has that improved.

It's a great question.

My sense of it which is anecdotal, are we seeing deals getting done and are we seeing people building stores and seeing some sign that there is some capital available, I would say it's slightly better than it was the last time I was asked this question.

So it certainly not worse and probably modestly better, but still it's we are still in a situation where the banks are inclined to lend money to the businesses that don't need it and reluctant to lend money to the business that really do.

So that conservatism in terms of the credit committees and lending practices of banks appreciably has not changed if it's better it's only better a little bit.

Thank you very much.

You bet.

Last question comes from Colin Guheen with Cowen.

Most of my questions have been answered.

Couple of quick ones.

Dave with you give us your opinion about competition from outside the channel especially the grocery channel?

How you see that and how that figures in to maybe a broad context of long range strategy for pizza delivery companies.

We studied that hard in the recent past because we always look at it with one eye, but we decided to dig in to find out whether there was a material change in what was going on in the whole take and bake area, with some of the chains, grocery stores, the Wal-Marts of the world that gotten in to the pizza business, the frozen category, the product improved in terms of quality.

Are they making end roads.

Our general assessment is that they're experiencing a lot of the same pressures that we are.

That this is really not about anybody benefiting from anybody else's demise in the category there is overall pressure in spending.

The frozen guys and take and bake guys are experiencing the same kinds of pressure, we don't believe there is a big winner in this.

The only quasi big winner is that you got your brand position as standing for qualities not important service is not important, competitive advantages or proprietary positioning is not important, just cheap is important, if you got a business model that affords you the ability to sell cheap, there is a segment out there, there has always been a segment but it's a bigger segment today of people who will opt in to that at least temporarily because they are looking for the best deal in town.

Any beneficiary it's a brand that stands for that kind of positioning other than that I think we are in the same situation.

Maybe one other question, where are you with awareness around your online ordering platform and might at the different levels of media might be more of a message devoted to the technology platform.

We monitor monthly basis.

We are improving but it's got to get better.

We need to it get better, as you can see we are tagging all commercials, it is in all of our print and some cases creating incentives where there is two tier pricing, one if you order from us through regular channels and a better price if you order online.

I believe that you will continue to see more investment and activity from Domino's driving people to the online activity, ticket is better, in many instances the experience is better, it access tracker and some of the other amenities that we found that our consumers really appreciate.

So we are pleased with our progress but we have a lot of improvement that's still out there and we are very very focused on it.

Is the improvement in awareness or more in use?

Well, both.

I think one gets you the other.

We need to continue to let people know that that experience is available to them and how easy it can be, as the awareness grows we get more people who give it trial our view is that the more people that try it get hooked on it.

Lastly, where are you in the evolution of the chicken business?

How would you kind of frame that for generally?

We have two products right now that are I would call them both very successful, very meaningful in terms of combined mix and number of orders that go out of the Domino's Pizza store with chicken being one of the products, bone in chicken we think is the superior product in the entire industry.

And we stood for that for a long, long time.

I challenge anybody to buy ore of wings from all of the players in the industry line them up, ours will be the high test quality without question.

Particularly, of all the delivery guys but most of the sit down guys we are proud of that product, it does a great job.

Our boneless product, our kickers is a smaller product line for us, but it's definitely held its own over the years and people really enjoy it.

We experiment and continue to test and have testing in ways to build upon the platform.

It hasn't been a high emphasis area but not we are ignoring, we watch what other people are doing in managing the wing business.

It is not something we have a deaf ear to.

We like where we are, we see some opportunity theres but a lot more work needs to be done before we talk about it.

Looking back on the 2009 possibilities, and on units sit more of the bull middle or the bear cases that you laid out back at the beginning of the year, halfway through with the year.

As far as the outlook for the year?

The 2009 possibilities I know you don't give guidance but during the analyst day we talked about a bull case, middle case and a bear case.

Different unit counts associated with them.

I was wondering now that we are halfway through the year if one of those looks more probable than the others?

We are probably closer to the middle.

Either one of the other examples although I would tell you when we put that together, the which was last fall, I would describe the overall economic conditions and pressures as being more severe than anticipated but having said that I think we are doing a better job than we would have an in terms of how we are hanging in there and closing and openings falling and holding our own in terms of sales.

Great, thanks a lot, appreciate it.

You're most welcome.

They are no further audio questions.

I want to thank you all for being on the call as we tried to communicate honestly, it continues to be tough out there, there is nothing easy in this environment.

That's not news the any of you, I'm really proud of my team and the accomplishments that we achieved in the recent past.

We are regaining our rightful positions as the leader in our industry.

And our franchisees are engaged and improving and performing.

They got a lot of passion and a lot of excitement for what can be.

There has been a bit of a reigniting of that passion in the recent past, we are very excited about that, we very upbeat about results if the first half.

When traffic is growing and the retail industry, good things happen.

The fact we are getting more customers into the stores opens up a whole new realm in terms of opportunity.

We look forward to updating you on the results of our third quarter, and hopefully if we continue to execute really well and we can get a little bit of help from the consumer and the overall spending environment out there, we continue to be we will continue to be as upbeat as we are today.

Thank you for participating in the call and look forward to talking with you soon.

Ladies and gentlemen, this does conclude today's conference call, you may now disconnect.