達美樂 (DPZ) 2009 Q4 法說會逐字稿

Good morning.

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

At this time I would like to welcome everyone to the Domino's fourth quarter and year end 2009 financial results conference calls.

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) Thank you.

I will now turn the call over to Ms.

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

Ma'am, you may begin.

Thanks, Carmen.

I appreciate it.

And thank you everybody for joining us this morning.

We'll open with a couple of housekeeping items, one being I'll turn your attention to our Safe Harbor statement that is listed on our 8-K and press release, and I would also ask the media to be in a listen-only mode this morning.

We will go through our normal procedure, but there will be one thing that isn't quite as normal for us this morning, and that is that I have three people to introduce.

The first is Dave Brandon, our out-going CEO, who will also remain the Chairman of our Board.

But also with us today is Patrick Doyle, our in-coming CEO, and of course, Wendy Beck, our Chief Financial Officer.

So we're going to begin this morning with some comments from Wendy.

Great thanks Lynn, and good morning everyone.

I'm extremely pleased with our fourth quarter results.

Specifically, I'm thrilled with the positive domestic and international same-store sales for both the quarter and the year, given the weak global economy.

International continued with strong same-store sales, and I'm proud to report that this quarter marked the 64th consecutive quarter of international same-store sales growth.

Before we jump into the numbers, I would first like to remind everyone that our fourth quarter included a 53rd week this year.

Typically our year consists of three 12-week quarters and a 16-week fourth quarter, but this year, our fourth quarter consisted of 17 weeks.

This happens every five to six years, so you won't have to contend with this again for some time, but please keep this in mind when you build your 2010 models.

Now let's jump into our financial results.

Walking down the P&L, I'll start by taking a look at our top line for the quarter.

Global retail sales grew 13.5% during the quarter, when excluding the impact of foreign currency.

However, when including the positive impact of foreign currency, our global retail sales grew 16.4%, as we started to see foreign currency working in our favor during the fourth quarter.

In addition, we benefited from the extra week this quarter, which accounted for approximately 8.6% of the growth in the fourth quarter.

The remaining increase this quarter was driven by both domestic and international same-store sales growth, as well as store count growth in our international markets.

Now looking at the different business components, domestically, our same-store sales were positive in the quarter versus the fourth quarter of 2008.

Franchise same-store sales were up 1.5%, while Company-owned stores were up 0.9%.

We closed a net 10 stores domestically during the quarter.

This was primarily the result of a store rationalization within several of our Company-owned store markets, where we planned for and closed 14 stores during the quarter.

We have been very conservative about closing corporate stores in the past, but after an extensive review, we closed these stores primarily as a result of having built stores in anticipation of market growth in some former boom markets like Arizona.

We feel that closing these underperforming stores was the right answer and will make these markets stronger.

These net domestic closures were again buffered by our strong international store growth.

And turning to our international division, international same-store sales were positive 3.9% on a constant dollar basis, and our international division grew by a net 123 stores in the quarter.

Before I jump into our top line performance, I would like to remind everyone that we continue to believe that our global retail sales, and not our revenues, are the best gauge of our top-line performance, since retail sales are not affected by changes in store mix or commodity prices.

Our total revenues for the fourth quarter were $462.9 million, a $34.7 million or 8.1% increase from prior year.

Significantly all or $34.4 million of this increase was attributable to the 53rd week.

Additional revenue increases came from higher international royalties due to store-count growth, same-store sales growth, and favorable turn currency impacts.

Offsetting these increases were lower supply chain revenues due to lower cheese prices, and lower Company-owned revenues, due primarily to having less Company-owned stores than a year ago.

Further detail regarding our revenue by business unit can be found in our Form 10-K that was filed this morning.

Now moving on to our operating margins, our consolidated operating margin as a percentage of revenues increased 2.5% in the fourth quarter versus the prior-year period.

The percentage increase in our consolidated operating margin was driven primarily by higher margins in both our supply chain and Company-own store businesses, both of which benefited from lower cheese prices and higher volumes quarter-over-quarter.

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

They do, however, benefit our supply chain margin as a percent of revenues.

Our supply chain margin increased 2% from the prior-year quarter.

Higher traffic in our stores lead to larger volumes in our supply chain centers, which helped contribute to the margin improvement.

Commodities, including cheese, dropped significantly versus the prior-year quarter, as well as the full-year 2008, which contributed to the supply-chain margin increase as a percent of revenues.

The average cheese block price in the fourth quarter was $1.48 per pound, versus $1.79 last year, or approximately a 17% decrease.

Our expectation in 2010 is that we will experience a slight increase in cheese prices from fourth quarter 2009 levels.

Our margins also benefited from deflation in most other non-cheese commodities.

Additionally, our supply chain margins benefited from reduced fuel prices and operating efficiencies put in place over the past year.

During this tough environment, we have done our best to create efficiencies in our supply chain centers.

In fact, in 2009 our franchisees participated in record profit sharing payments.

We will be lapping some of these efficiency initiatives, like our twice a week deliveries in 2010.

Going forward, we see more sustainable growth coming from volume increases.

Our Company-owned store operating margin increase 1.7% from the prior-year quarter.

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

Food costs, as a percent of revenues, dropped 1%, mostly due to commodity price deflation.

Delivery costs were lower because our Company-owned store driver delivery reimbursement dropped with lower fuel prices, and utilities were down as a result of lower gas and electric rates.

Offsetting these lower costs were higher labor expenses in the quarter, resulting primarily from the previously discussed federal minimum wage rate increases.

We continue to closely manage this line item.

Now turning to G&A expenses.

G&A increased $8.4 million in the quarter versus the prior year.

Breaking down the increase, approximately $3.7 million of additional expenses were incurred as a result of the 53rd week this year.

Additionally, $2.3 million of increase resulted from changes in our store mix in 2008 and 2009, as outlined in Items Affecting Comparability any our earnings release filed this morning.

Excluding these two items, normalized G&A increased $2.4 million versus the prior year quarter, due primarily to targeted investments we made in 2009.

Partially offsetting this increase in the quarter were lower bad debt expenses, which we see as an indicator of the strengthening of our franchise system.

In 2010, in addition to some normal inflation in G&A, we will continue to make targeted investment s in certain sales-building and technology initiatives, and have included an additional $3.1 million in G&A in our 2010 plan for these initiatives.

We expect to have significant paybacks, as these investments are essential to support future growth in our business.

Separately, we are going to be insourcing certain functions, including a call center, which will increase our G&A spend by just under $2 million in 2010.

However, there will be compensating revenue for these expenses, therefore there will be no net impact to the bottom line from this insourcing.

Turning to our income taxes, our effective tax rate was 38.5% in the fourth quarter, and 41.2% for fiscal 2009.

However, due to changes we are making in our overall tax strategy, we are currently anticipating a tax rate of approximately 39% for the foreseeable future.

Next bottom line earnings.

Our fourth quarter diluted EPS as reported on a GAAP basis was $0.41,or $0.30 when adjusted for items affecting comparability, including adjusting out the estimated $0.05 impact for the 53rd week.

To be clear, 53-week EPS as adjusted was $0.35 in the fourth quarter and $0.92 in fiscal 2009.

52-week EPS as adjusted was $0.30 in the fourth quarter and $0.87 in fiscal 2009.

The $0.30 as adjusted EPS figure is an $0.11 increase from the $0.19 in 2008.

Here is how the $0.11 difference breaks down.

Our improved operating results benefited us by $0.09 in the quarter.

Our lower interest expense, primarily as a result of our lower debt balances, also benefited us by $0.05 in the quarter.

And foreign currency positively impacted us by $0.01 in the quarter.

A higher effective tax rate negatively impacted us by $0.03 in the quarter, with changes in our share counts negatively impacting us by $0.01.

Now turning to our balance sheet in the fourth quarter, we repurchased at a discount $49.2 million of principal on our senior notes for a pre-tax gain of $7.9 million.

Subsequent to the quarter, we repurchased an additional $50 million of principal on our senior notes for a pre-tax gain of $5.2 million in the first quarter of 2010.

During fiscal 2009, we repurchased $189.2 million of principal on our senior notes for $132.9 million, resulting in $56.3 million of pre-tax gains.

These debt repurchases saved us approximately $3.1 million of interest expense in the fourth quarter, and $5.7 million in fiscal 2009.

So [live] to date, including our 2010 buy, we have repurchased a total of $239.2 million of principal on our senior notes, resulting in $61.5 million of pre-tax gains.

As a reminder, we are taking advantage of stimulus plan tax incentives, which allow us to defer the gains on these debt repurchases until 2014, and pay taxes over a number of years.

In terms of our leverage, we continue to be very comfortable with our debt levels and our current capital structure.

I am pleased to announce that our debt service coverage ratio is currently at a level where we would be able to automatically extend our current financing in 2012 and 2013, provided our ratio remains at or above current levels.

Our plan is to continue to improve this ratio by both delevering and growing our earns and cash flows.

So in summary we love our 6% rate, and we are pleased with our operating performance, but as we continue to delever, we are open to considering attractive refinancing opportunities that are in the best interest of our shareholders.

Turning to our capital expenditures, in 2010 we will be investing more capital dollars into technology, but we expect to continue to remain in our range of $20 million to $30 million in capital spending.

A key technology investment in 2010 is the insourcing of our online ordering platform.

Online ordering has become increasingly important to the Domino's system, and it is crucial that we continue to build on that platform to keep up with the growth and drive the business.

In closing, we ended 2009 with positive sales and healthy cash flows, which will position us well for 2010.

Additionally, we put ourselves in a great position to automatically extend our current financing in 2012 and 2013, and were able to further drive shareholder value through our debt repurchases.

Our free cash flows continue to remain strong, as we generated nearly $1.5 million per week on average in free cash flows during fiscal 2009.

Thanks for your time today, and now I'll turn it over to Dave.

Thanks, Wendy for a very positive financial overview, and thanks to the rest of my leadership team, their hard working team members, and our terrific franchisees for all of their tireless work and effort that went into making our fourth quarter and our full-year 2009 a successful year of progress and achievement for our Company.

We believe our performance in the fourth quarter of 2009 put us ahead of both of our national pizza competitors in terms of traffic and sales.

Value oriented promotions, together with the highly successful introduction of our new and inspired pizza at the very end of the quarter, helped drive us into positive territory for the quarter and the year.

One of our primary goals for 2009 was to maintain positive traffic results throughout the year, because we know today's traffic results will be tomorrow's same-store sales results.

We achieved this goal with four quarters of positive traffic in 2009.

So the story for Domino's Pizza in 2009 was one of a disciplined focus on the business, and a shift in domestic sales momentum that was building really throughout the year.

Because of this, we're off to 2010 starting with a full head of steam, and we are experiencing some very positive early results.

When we were at this same point last year, we told you what we thought you should expect from us in 2009, and although we don't give guidance, we have always provided a long-range outlook of where our annual sales and store growth levels typically fall.

After three years outside of this range for domestic sales, and a year ago we had a particularly murky view of where the economy might go, we decided going into 2009 it would be best to provide more color on our budgeting assumptions for what was then the upcoming year.

Although it was a difficult forecasting environment a year ago, we ultimately did a pretty good job of delivering on those expectations, because at that time, our best estimate for domestic same-store sales was to be flat for the year.

Sales actually came in a half a point better than our forecast, as we were able to edge our way into slightly positive territory, clearly a sign that we had the right plan in place to take on the environment we faced in 2009.

We had a plan to diversify our menu and provide more choice for existing customers and attract new customers.

We had a plan to provide price points at both ends of the spectrum, both value and premium.

We had a plan to improve our store operations, upgrade our domestic system, and run tight P&Ls at the store level.

We had a plan to manage G&A costs very carefully and get more for less in the way we ran the business.

We had a plan to build on the consistently positive performance of our international business, and our plan included strengthening our balance sheet by using our free cash to repurchase a significant amount of debt, and to increase investors' level of comfort with our asset-backed securitization finance structure.

First, we executed our plan successfully in the areas of product diversification and day part expansion in a big way.

80% of our menu now is new, including sandwiches, a premium pasta line, pasta, lava cakes, and our new core pizza recipe.

This was enhanced greatly by our technology platform.

Domino's now leads the category in market share for online ordering, and recently ran past the $1 billion mark in online sales.

And our lunch and light-night business have helped boost our traffic out there the year.

Next, we also made good progress on our operational plan.

90% of our domestic franchisee's attended our mandatory High Performance Franchisee training.

We believe this was an investment that is already resulting in better operations.

Domino's was ranked number one in the American Consumer Satisfaction Index this year, and the training sessions were very positively received by our franchise partners.

We had a rationalization of stores.

Some of this was due to troubled economy, but it was also a consequence of our ongoing efforts to weed out some of our weak operators.

At the beginning of the year, we said we expected to close a net 100 stores in the US, and we came very close to that forecast.

In 2010, we plan to return to net zero domestic store growth, and that will hopefully set the stage for positive domestic store growth in 2011 and beyond.

And as Wendy mentioned, we came in as planned for both our CapEx and G&A spending.

Third, our international business performed well and as we planned.

Internationally we said sales would come in between our consistently stated range of 3% to 5%, and despite some lumpy quarters, same-store sales for our international business finished the year up a solid 4.3%.

This is another excellent showing from this division, and continued proof of the predictable and reliable nature of this business.

In terms of international store growth, we said we would be in our consistently-stated range of between 200 and 250 net new units.

We blew this number away for the year, opening a net 346 international stores in 2009.

So even if you back out the net negative 120 stores in the US, we solidly hit our net 200 to 250 store openings for the year.

We opened three new international markets during the year, the most significant one was our conversion in Spain.

And we continued our strong store growth in many of our existing international markets.

We forecasted a negative impact on international royalties from FX during the year, which turned out to be more of a factor in the first half than it was in the second half.

The last element of our 2009 plan was we would make opportunistic debt repurchases and share more information about where we stood with our ABS financing covenants, and what we believed our prospects were for extending this financing.

Wendy already covered this in her section, so I won't repeat what she has already shared with you.

But I will add, however, that I am proud of how we have demonstrated, with our free cash flow generation, our debt repurchase activity, and our candid reporting of the confidence that we have in our ability to automatically extend our highly attractive financing as far out into the future as 2014.

Our balance sheet is strong, flexible, and should not be a concern for our investors.

We have proven that our business model works in the toughest of times, and it doesn't get any tougher than it was in 2008, and we're excited to demonstrate how well it works in better times, which was certainly the case in 2009.

And in the early part of 2010, times for Domino's Pizza, if not the economy more generally, I can tell you times for Domino's Pizza are very, very good.

When you can drive even modest positive sales comps and combine that with robust global store growth, Domino's is a model that produces abundant free cash flow.

2009 showed how this upside trend can work, and we believe 2010 will even further demonstrate how terrific the upside can be.

As I mentioned earlier, the long-range outlook that we provide investors and analysts reflects our view of how our business will perform over any extended period of time.

In 2009, we felt compelled to give you additional details on our domestic budget assumptions that were outside of this stated long-range outlook, mainly because of the shaky economic ground we were all standing on a year ago.

I don't feel the same way about 2010.

Although most indicators, like unemployment statistics, a continued tight lending environment, and general economic uncertainty, would tell you that our economy is far from out of the woods, I believe that Domino's has built a strong enough foundation with the work we did last year to perform well in 2010, despite some of these negative factors.

We don't normally comment on current performance trends when reporting on the previous quarterly results, and we certainly don't plan to change that policy as we look forward.

However, due to some unusually significant trends that have developed in the first several weeks of 2010, we feel a sense of obligation to simply advise you of the following.

We are off to a very strong start in the new year.

The trial of our new core pizza recipe has been very successful.

Buzz about our media campaigns has been pervasive, and both our sales and traffic have been up significantly since the campaign began.

How long this trend will last remains to be seen.

Marketing 101 suggests you should expect a sales drop-off as the novelty of the advertising and the new product recipe wears off, but we are more than pleased with what we have seen so far, and look forward to updating you on how this introduction nets out, in conjunction with our first quarter earnings report in a couple of months.

Based on where things stand today, I am pleased to advise you that we are comfortable returning to domestic sales growth levels consistent with our long range outlook.

Although there may be years where we will go above or below this outlook range, and you've certainly seen examples of that over the past several years, we expect, and you should expect, that over any significant span of time, Domino's will typically perform as follows.

Domestic same-store sales will be in the 1% to 3% range positive, international same-store sales will be in the 3% to 5% positive range.

Net global unit growth will continue to be in the 200 to 250 store range, and global retail sales as a result of those assumptions will come in somewhere between 4% and 6 %.

With that, Wendy and Patrick and I are ready for your questions, and afterwards, I'll have some brief closing remarks before we conclude the call.

Let's open it up for questions.

(Operator Instructions) And your first question comes from the line of John Glass with Morgan Stanley.

Thanks very much.

So following, Dave, on your comments about this very strong launch of the new pizza, how do you assess what is trial and what is repeat?

Do you have mechanisms in place where you can tract that, and are there any data points you can provide to us about the early read on the repeat purchase of this new product?

We can track that information very specifically.

Obviously with the data warehouse that we have with all of the customer records and files, we can measure new customers, we can measure repeat customers, we can see how lapse customers have performed, and we don't typically share those specific data points with you, just because we would like to know how our competitors fare out when they launch certain products and promotions.

But I will tell you this, all of the indications lead us to believe that this new product recipe and the buzz and advertising around it has brought in a significant number of new customers.

We're getting wonderful repeat statistics, and overall, the feedback we're getting on our new pizza formula is just nothing short of fantastic.

We couldn't be more pleased.

And I guess then, the second question is, what is this coming at the expense of?

Do you have any category data that suggests you're taking share from the other major national chains, is it independents, or do you think that maybe, as Papa John's believes, the category is just growing at an accelerated rate today versus six months ago?

Well, truthfully the fact that we just launched this in the very latter part of December, the reporting periods in terms of market shares and how that may or may not be shifting, just really isn't a available.

We get more near term category information, and we believe that the category is performing better, and we think we're one of the big reasons for that.

Thanks very much.

And your next question comes from the line of Matt DiFrisco, with Oppenheimer.

Thank you.

I just wanted to follow up a little bit on that, as far as the momentum with the sales, are you seeing any halo effect as far as expanding also into your other products, or it is just the pizza that it's driving?

Are you having sort of a halo effect to the overall brand and some of your other items?

Sure, Matt.

I'll let Patrick handle that one.

Matt, in terms of the halo effect, clearly we're out there promoting pizza; pizza is doing very, very well.

The extensions that we did last year continue to perform well, but the focus so far this year has clearly been on pizza, and that's really where we're seeing the results.

So the other things are hanging in there just fine.

They continue to be an important part of our strategy going forward, but the focus is clearly on pizza right now for us.

Are you saying, though, that they are positive as far as the extensions and the products that were launched in prior years?

Are you still seeing positive growth off of those, or are they giving up and starting to flatten out a little bit, or come back a little bit and you're seeing the incremental will all be pizza?

Well, I think any time you go out and your promote pizza, and we have been on air pretty much since the beginning of the year, really, the end of the last week of last year with this new pizza, where you are seeing the growth coming from right now is going to be off of that pizza.

I would just add, though, that when you see customer counts growing appreciably, certainly to Patrick's point, pizza is lifting those customer counts and is really the driver, but when you see customer counts lifting dramatically, you may see mix changes in some of your ancillary products, but overall, you are going to see volume increases, because we have more customers ordering more products.

So all of our product lines are winning as a result of this momentum.

I guess the one thing I was looking at, though, since pizza is selling so well, why aren't we seeing, I guess, more of an impact on the overall margins from the greater sales of doe balls as well?

Is there something offsetting that with these new ingredients, or it's just commodity cost pressures offsetting that?

Remember, we just launched this new and inspired pizza the last week of fourth quarter, so the results that you are looking at for fourth quarter, 17 weeks, 16 of those weeks were without promotion on new and inspired.

No, I'm aware of that.

But I'm just curious of the strength in the fourth quarter, though, was that also pizza oriented, and if we're looking at momentum building on the pizza side, and in the first quarter, would it be correct then to assume more pizza balls are going to have the natural effect of what you historically have had, that they also will have a positive effect on the margins?

Your knowledge of the business model should tell you if we're selling a lot more pizza, which means we are selling a lot more dough balls, it is going to have a positive impact on our overall margin.

Got it.

Thank you.

Your next question comes from the line of Joe Buckley with Banc of America.

Hi, thank you.

A couple of questions.

You are probably the only Company I would ask if the wintery weather we've had has actually been a positive for your sales?

Have you seen that [effect]?

Here is the deal, Joe, in the first couple of inches of snow it is a positive, because people stay home and we can still get through on the roads.

The next 10 or 12 inches start to make it pretty tough.

We had a lot of store closings recently, with the big storm in the Southeast.

As it relates to the fourth quarter, I'm not sure there's any significant weather impact one way or another.

And obviously as we have had really bad weather here to start the year, there is a period of time where it helps us and a period of time it hurts us, and it probably overall balances out.

Okay.

And then Wendy, a question on the debt extension, you qualify for both extensions.

What sort of happens now, is there an advantage to waiting on your decision?

No.

So Joe, we can certainly be looking for opportunities to refinance, but on the other hand, we consistently state that we're very pleased with how this particular debt is performing for us, and we love the fact that we have got a 6% overall interest rate.

So we're kind of sitting out there opportunistically, looking to see if there is anything that jumps out, that says this is the time to refinance.

On the other hand ,we're kind of sitting in the cat bird seat saying that we can extend and we can also get past the bubble in 2012 of all the other refinancings.

I guess this is - - I think it's fairly obvious, but you can do partial refinancing?

I mean if you saw an opportunity you could raise a certain amount of money, and refinance some of the existing debt?

Sure.

That's absolutely a possibility.

Okay.

Okay.

Thank you.

And your next question comes from the line of Jerry Bernstein with Barclays Capital.

I'll stick with Jeff.

But couple of questions.

I didn't know who that Jerry guy was.

One question, follow-up on the comp side, Dave, I think you mentioned marketing 101, you would expect to see a deceleration with the new product overtime.

Is it fair to say at this point, can you give us any kind of trajectory that we're still on an upward trend, or in the first nine weeks, it is not surprising that you would see some deceleration from the first two or four weeks?

Okay, I have lawyers staring at me right now.

All I will tell you is that we're not going to give guidance and we don't want to get drawn into numbers, but I will tell you this, marketing 101 says that you should see is declination after a period of time in the velocity of any of these promotions when you throw big advertising, a big price point, and a new recipe out there.

And truthfully, as we sit here today, it has surpassed our expectations in its ability to sustain itself.

Beyond that, I can't really comment.

Okay.

No, I appreciate that.

And then Wendy, obviously with the expectations around comps somewhat wide in terms of Street expectations and investor sentiment and whatnot, I mean, is there any sort of sensitivity you can provide in terms of what an incremental comp would be on a quarter or a year?

Obviously we're talking about perhaps something much more than one comp point?

I know once you get above a certain level, the flow through is a lot more meaningful, so is there any kind of color around what a comp point US or international would be quarterly, annual or - - ?

Wendy is looking at me.

I'm looking at her.

Our lawyer is look at both of us.

We have gone way beyond the bounds in terms of our normal process of talking about existing current quarter that we haven't reported on, and we have done that not necessarily because we wanted to, but because we have been given guidance and instructions from our legal department, that when there is a significant change in trend, that we need to report that.

And what I want you to know is that there is a significant change in trend, and we really don't want to, and don't feel comfortable getting drawn further in to specifying that in the first quarter.

But we sure look forward to talking to you in May.

Okay.

And then just lastly on the commodity side, and I know back in mid-January, you said that you expected higher commodity basket, and I think you said if we assume cheese at $1.70 per pound, I think Wendy you mentioned earlier, that you are assuming cheese prices will be above the fourth quarter level.

It does seem like prices have come down thus far in 2010.

Is that still your assumption to get to a $1.70 when we're currently below the $1.40, is there - - what is your outlook for the - - ?

Sure, I would use a range of$1.50 to $1.70, and of course it's difficult to forecast what cheese is going to do, but right now that's what we're looking at.

And Jeff, it's fair to say that right now cheese is trading at less than what we would have expected.

The down pressure we have seen, particularly in the very recent past, is welcome, terrific, but not something we would have forecasted.

Okay, but that $1.50, to $1.70 is versus mid-January where you thought it was $1.70.

Exactly.

Okay, that's very helpful.

Thank you very much.

Thank you.

Your next question comes from the line of Greg Badishkanian with Citigroup.

Great.

Thanks.

Just a few questions here.

First, just because you guys have a pretty good historical reference, in the past have you ever had a similar type of new product, where you have had similar results that you have are seeing right now with the new pizzas?

Well I have been around here for 11 years, and the answer is no.

Okay.

All right.

Good.

And also, I know this is kind of old news, but in the fourth quarter, I just was kind of surprised that your same-store sales were a lot stronger than at least I had expected, especially lapping the Oven Baked Sandwiches.

What do you think are the key drivers of that?

Well, as I said in my remarks and this is a good time, I'll talk because I can commend Patrick.

Patrick and his team in Domino's USA have just done a phenomenal job of bringing, throughout the year, all of the elements together, as I mentioned in my remarks, the way we have trained and pushed our franchisees, the way we've weeded our out our weak franchisees, the building and the strengthening of our marketing, all lead us to a point where we really felt momentum building throughout the year.

And you may not have seen that necessarily in all the stats, but we've felt it building, and in the fourth quarter things just started to really click into to place.

And as I've already indicated, that has continued into the first quarter.

So there's no silver bullet in this business.

It is always a combination of a number of factors, but right now I think we are operating and marketing at peak levels based on my 11 years of experience at this Company.

Yes, I appreciate that, and I know you guys usually don't comment on forward type of guidance or current trends, so it must be, when you say significant, I'm assuming that that's a pretty good trend, so encouraged to hear that.

Also just in terms of buying back notes at discount, is there some opportunities now, and kind of what are your notes trading at now?

Well, the last notes that we purchased have been purchased in kind of the high 80s, like 88, 89.

Right.

As you know we started out at a little less than $0.50 on the dollar were the first notes that we purchased, and we have been kind of ramping that up as the market has tightened and as our performance continues to improve.

We continue to believe that the current best use of our free cash is to delever the Company and continue to strengthen the balance sheet, and that's been our practice, and you can see it with our actions over the past many quarters, and certainly that's been the case in the recent past.

So as the debt becomes available, if we feel it's attractive in price, and it's the best use of our capital at the time, we will likely continue that practice.

Right.

Exactly.

Great job on the quarter and very good job on the new-product rollout.

Thank you.

We appreciate that.

Your next question is from the line of John Ivankoe with JPMorgan.

Great.

Hi.

Thanks.

Could you provide a little bit more insight in terms of the international unit development strength in 2009, and I guess why, implicitly, you think that might be a slowdown into 2010, especially as we start the year a better outlook than we had a year ago?

Well, the thing that kind of [expletive] the comparison is when you get 90 stores overnight in Spain.

That really jumps your activity in a given year.

We don't anticipate conversion opportunities like that in the future, so to comp up against that, we have got to build those stores one at a time.

But I can tell you, our international group is as both motivated and engaged as I have seen them in both driving growth in our existing markets, and opening new markets.

We have got a handful of new markets right now, we're at various points of negotiating and locking up agreements and contracts where we'll be opening up the brand in new areas.

At the same time, our large players continue to grow.

I saw that our partners in the UK announced their earnings performance, I think today?

Recently.

And they continue to do terrific things, and they are out growing stores.

Everybody across the globe seems to be in a position where they are recognizing the benefits of growth, and they're employing those practices and plans, and we feel very, very good about the continued trajectory of the international business.

And a follow-up on that, on the US.

I mean, comps typically a leading indicator of development, your primary commodity staying at very reasonable levels in terms of the long-term model.

I mean, what is your sense in US development as we move throughout 2010?

Do you think we're going to end the year with momentum that we'll be seeing net adds in the relatively near term?

You have got it exactly right, and with same-store comps moving, order counts moving, clearly unit profitability is getting better, that's going to improve the picture.

Last year we were net down 120, and what we're telling you is this year our goal is to be at net zero, which is nice progress.

Clearly our longer-term goal is to get back into positive growth, and as we see the momentum on the business continue, hopefully that is going to move us that direction.

Okay.

And just one final one for me, and it might be a little bit of housekeeping.

Are we very heavily weighted towards national advertising in the first quarter, as you kind of spread out the calendar?

In other words the amount of at attention that the new pizza is getting now, should we by definition expect to see significantly less air time of products in general in the second, third, and fourth quarter, or can this current rate be maintained?

We don't get into the specifics on what we're doing with our promotions, but as you do know, we did change your advertising fund for this year.

So it's now a 5.5% national fund, so you will see a shift to more national advertising, and the guidance that we have given is that we will be on air more weeks nationally in 2010 than at any point in our history.

I'll follow up that just to point out the obvious, those funds are a derivative of sales growth, and as sales growth happens, the funds actually perform better, provide us with more resources to do more things.

And just so we know, and I don't remember the quantification of the actual weeks, 2010 versus 2009, on the air, are you - - ?

We haven't given that.

Okay.

All right.

Thank you.

Fair enough.

And your next question comes from the line of Mitch Speiser with Buckingham Research.

Thank you very much.

A few questions.

First, with the new pizza it is being promoted a minimum of two pizzas for $5.99.

That is, I think best price point out there.

How sustainable is this promotion, is this an every day low price?

I guess the direct question is will it last forever?

I don't think anything lasts forever.

Right now that promotion, in combination with the impact it's having on our unit economics, and the momentum that it's providing the system, is something both being embraced by our franchisees as well as our corporate stores, and is working exactly the way we hoped it would.

We will never telegraph when it will end, if it will end, when it will be used and how it will be used, but just understand that it's turned out to be a very, very good way of opening up our new story to a bunch of new customers and giving them plenty of reasons to try our product, and it's working very well.

Okay, as a follow-up to that question, I believe the food costs for the new pizza are a little bit higher.

This is a discounted medium pie.

When we look at the store margin, the US Company store margin for 2010, would it be safe to assume, to expect a down percent margin?

No, it would not be safe to assume that.

Okay.

And that is just driven by the incremental volume, and I would think - - I guess my next question would be, are there the same proportion of the amount of add-on sales with these pizzas, meaning, drinks, desserts, other stuff?

We went in to this knowing exactly based on the few pennies that were invested in the product to get the new recipe implemented, we knew exactly what the same-store sales needed to be to break even, if you will, on that investment, and we have gone way beyond that break-even point.

Great.

Thanks.

My next question, you did pay down $50 million in the first quarter.

Was that all paid down through internal cash and cash on hand?

Yes, it was.

So if you look at where our cash came from, it's the free cash flow, the $78 million from 2009, as well as we drew down our VFN in the prior year, and the change in the cash that we hold up from the beginning of 2009 and then into 2010, and any cash that's coming in in 2010.

Got it.

Great.

And along the lines of debt, you did mention that you can't extend your maturities.

I know there were certain tranches, are you at a level where you do not need approval?

That's correct.

Based on how the business is performing, and the trajectory that we're on, we will not need approval, we'll be able to extend to 2014.

And all that does for us is it just gives us a wealth of opportunities, as it relates to how we think about whatever the next capital structure looks like.

We'll have several years to evaluate the markets, look at how the business is performing, deciding the method of refinancing that we want to employ, and that flexible is exactly what we hoped for.

Great.

And I think my last question, I came on a little bit late, sorry if you covered it.

But just, when it comes to the comps and the extra week, in the fourth quarter, the comps do include - - it's a 17-week comp versus a 16-week a year ago?

On the same-store sales?

Yes.

You are talking about comps, it would not impact comps.

Right.

Because that's week against week.

Okay.

So is it 17 weeks versus 17 weeks then?

Yes.

Okay.

Got it.

Great.

Thank you.

That's all I need to know.

Thank you.

And your next question comes from the line of Mark Smith with Feltl and Company.

Just to follow up on the impact on comps, can you talk about the last two to three weeks of the quarter, and the impact that that may have had on the quarterly comp?

No.

We don't give period-by-period or week-by-week results.

I think the only thing that we've said and will continue to say is we built momentum through the quarter, and certainly the introduction of our new formula has had a significant impact on the business.

And other than that, we don't want to quantify it.

I guess without pushing my luck here, did you feel, I guess good about where your comps were before the introduction, or announcement of the introduction, late in the quarter?

We felt good about where our comps were going into that last 10 days of the period.

We felt great afterwards.

How's that?

Okay.

That's good.

Thank you.

And then second, can you comment on lunch traffic throughout the quarter?

I'll give that one to Patrick.

Lunch has continued to perform well for us, and so it's clearly an opportunity going forward.

It has continued to perform well through the year.

It hah is part of why we had positive traffic in each of the four quarters last year, and it's something that will continue to get some focus from us.

Okay.

And then just maybe a piece of clarification, the new pizza has not been rolled out internationally at this point.

Can you talk about to do this internationally, especially as we look north of the border?

Well, we'll manage this internationally the way we do all of our product introductions, because some things are very portable and work very well, depending on the culture and the taste preferences of a particular country or region.

And so in some cases, you'll see us take the same play and run it the same way in that country.

In other countries, perhaps, the favor combinations and the recipe changes that we have made in terms of the sauce and the garlic seasoning on the crust, that may not play as well, and we may come up with a different combination.

So this is not something that we would just categorically expand globally, but certainly the learning here, both from the marketing and the recipe and all of the PR efforts that came around it, certainly the learning there will be shared with our international partners, and in many instances, I'm very sure it will help them improve their businesses.

Okay, great.

Thank you.

Your next question is from the line of Tom Forte with Telsey Advisory Group.

Great.

Thank you very much.

First off, congratulations on your performance in 2009.

So the couple of questions that I had, and I'll try to phrase them carefully, so historically, not in 2010, but historically, has the Olympics aided same-store sales?

And then can you comment on the dinner day part, including how the sales were on the Wednesday before Thanksgiving?

And then lastly, any thoughts on the full-year impact on earnings from foreign exchange for 2010.

Okay.

The Wednesday before Thanksgiving, I would suggest to you in 2009, was normative, meaning it is always a pretty good night for us, but I don't think there was anything unusual about this year versus previous years in terms of what we experienced.

The FX question I'll hand over to Wendy.

So for 2010, we would anticipate that it would give us the benefit of $3 million.

And then Patrick will take the other part of your question.

And Olympics have a marginal positive effect.

Any time you get people gathered around the television set watching something; the inauguration of President Obama last year had a great effect on sales for one day.

And so there's probably marginal positive impact from Olympics, but nothing material for your model.

Thank you very much.

And your final question is from the line of Michael Wolleben with Sidoti & Company.

Thanks.

Just wanted to touch on the debt repurchases again.

Now that you are seeing these prices come up to about $0.90 on the dollar, are you seeing more people come out of the woodwork in trying to shop it to you guys?

Is there more opportunities for you guys than there was at $0.50?

I'll let Wendy handle that one.

Actually I would say it's the opposite.

I think when the prices were down low, our lowest buy was around 48.25, there were a lot more opportunities.

But I'm not sure if it's that the holders are more comfortable, or if it's just the return in the overall economic environment, or the high-yield bond market, but there seem to be less opportunities.

Okay.

And then lastly, just that restricted cash on your balance sheet, what has to happen for you guys to free some of that up if you do need, or if the opportunity does arise to take out a big chunk of debt?

You must be talking with Patrick.

That's the same question he keeps asking.

First off, we did free up almost $18 million of restricted cash during 2009.

I'm not sure whether we discussed that publicly or not, but that was because of our performance, we were allowed to free that up.

Over the years we have reduced a number of items in the restricted cash.

It really comes down to our LC facility, it comes down to our insurance.

All I can say is we're working it.

We're constantly looking at it to see what we can free up, but there's reasons for all of it as well as our interest reserves, that we hole up and then pay quarterly.

Okay.

Thank you.

There are no other questions at this time.

Do you have any closing remarks?

Yes, very briefly.

I just want everyone to know that we're very pleased with our 2009 results, and I'm even more pleased that it is on this high note that I will be signing off as CEO of Domino's Pizza this coming Monday.

This will be my last earnings call as CEO, and I'll be turning the leadership responsibility of this great Company over to Patrick, and as you all know he is an experienced, trusted, and tested leader at our Company, who will continue to serve our shareholders and our stake holders in an exemplary fashion.

I'll be joining Patrick, Wendy, and Lynn for my last quarterly conference call in early May.

I want to be there for that one, when we'll report the results of our first quarter of 2010.

My role as Chairman will continue to allow me to be a part of this terrific brand and Company, one that I have had the honor and privilege to lead for the last 11 years, and in my role as Chairman, I will continue to work on behalf of our shareholders as I have ever since March of 1999.

So thank you, and we will look forward to reporting some exciting first quarter results in May.

Thank you for participating in today's conference call.

You may now disconnect.