達美樂 (DPZ) 2010 Q4 法說會逐字稿

Good morning.

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

At this time, I would like to welcome everyone to the fourth quarter, year end, 2010 earnings 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)

Thank you Ms.

Lynn Liddle, even begin your conference.

Thanks Keisha, and thank you all for joining us this morning.

I will direct you to our 10-K and our 8-K that we filed this morning, and to the Safe Harbor statement in the event that any forward-looking statements are made today.

I would also ask that the press, members of the press, be in a listen-only mode for our investor call.

And with me today, we have our Chief Financial Officer, Michael Lawton, and our President and CEO, Patrick Doyle.

We will begin with some comments from Mike, followed by Patrick, and then we will open for a Q&A.

With that, I will introduce Mike.

Thanks Lynn, and good morning everyone.

The fourth quarter was another outstanding one as we experienced robust domestic and international same-store sales growth, and we had strong international store-count growth.

2010 established a new base for Domino's with higher sales dollars and traffic at our stores.

And we will look to grow upon this new base in 2011 and beyond.

Before we review the numbers, I would like to remind everyone that our fourth quarter in 2009 included an extra week.

Typically, our year consists of three 12-week quarters, and a 16 week fourth quarter.

But the fourth quarter in 2009 consisted of 17 weeks.

This affected the comparability between our 2010 and 2009 financial results, and is outlined in more detail in our 8-K filed this morning.

Now let's jump into our financial results.

I'll start by taking a look at our system revenue for the quarter.

Global retail sales grew 13.6% during the quarter, excluding the impact of foreign currency and the extra week in 2009.

When including these 2 items, our global retail sales grew by 6.1%.

The increase was driven by strong domestic and international same-store sales growth, combined with store count growth in our international markets.

Now looking at the different business units.

Domestically, we continue to see an increase in repeat customers and higher frequency of orders during the fourth quarter, as we posted a 6.3% same-store sales growth number.

This was rolling over a positive 1.4% domestic sales comp in the prior year quarter.

Franchise same-store sales were up 6.4%, while company-owned sales were up 5.4%.

We opened 24 net stores domestically during the fourth quarter, and this was made up of 41 store openings and 17 closures.

We previously communicated our goal of achieving flat store growth in 2010, and then returning to positive store growth in the future.

I am happy to report that we met our objective in 2010 with 2 net new stores.

Now, turning to the international division.

International same-store sales were positive 9.0% on a constant dollar basis in the fourth quarter, rolling over a positive 3.9% a year ago.

For the year, we finished at 6.9% same-store sales growth, our best comp for a year in the last 10 years.

We open 158 net stores internationally during the fourth quarter.

The 350 net stores opened during 2010 marked the most net store openings in a single year for us.

The international businesses in great shape, and we were able to grow at this pace in 2010 because our franchisees are generating -- are generally generating solid cash flows in their stores.

As a result of our robust international store growth and the momentum we have built, we have increased our long-range outlook for global annual net store growth by 50 stores, and we are now projecting 250 to 300 net units per year.

Additionally, this resulted in an increase in our long-range outlook for global retail sales to 4% to 7%, from the previous range of 4% to 6%.

The international division continues to produce consistently strong results for our company, and we are proud of the accomplishments of this growth engine of our business.

Our total revenues for the fourth quarter were $480 million, a $17.1 million or 3.7% increase from the prior year.

When excluding the impact of foreign currency, and versus a comparable 16 week period in 2009, revenues were up 11.6%, as we experienced revenue growth in all of our operating divisions.

Almost two-thirds of the total revenue increase was attributable to our domestic supply chain operations.

This increase was a result of higher sales volumes combined with higher commodity prices versus the prior-year quarter.

Additional revenue increases came from a domestic franchise business driven by higher domestic same-store sales, and an increase in fees collected related to the in-sourcing of certain services, such as online ordering and a call center.

We also incurred a corresponding increase in general and administrative expenses for these break-even initiatives.

Further, higher international revenues contributed to our total revenue increase, due to both same-store sales and store count growth.

More detail regarding our 2010 revenue, by business unit, can be found in our 10-K that was filed this morning.

Moving on to our operating margin.

As a percentage of revenues, our consolidated operating margin increased 0.5% from 27.9% to 28.4% in the fourth quarter versus prior year quarter.

Due primarily to higher company-owned store margins and to a change in our mix of revenues, offset in part by higher overall commodity cost.

As a percentage of revenues, our company-owned store operating margin increased 2.2% from the prior year quarter, due primarily to our ability to leverage certain fixed costs, including occupancy and labor, with a higher sales volumes, combined with slightly lower average labor rates.

Partially offsetting these improvements was commodity price inflation during the quarter, including cheese and meats, which lowered our company-owned store margins.

Our top commodities, including cheese, increased versus the prior-year quarter.

The average cheese block price in the fourth quarter was $1.61 per pound, versus $1.48 last year.

An 8.8% increase.

Our expectation for 2011 is that our market basket will increased 3% to 4% over 2010 levels.

Now let's move on to our supply chain margin.

Our supply chain margin decreased 1.1% from the prior-year quarter, primarily due to the impact of higher commodity costs, including cheese.

As a reminder, higher cheese prices benefit our supply chain revenues but do not impact our supply chain dollar profit.

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

Turning to G&A expense.

G&A increased $3.5 million or 5.4% in the fourth quarter versus the prior-year quarter.

Excluding the $3.7 million impact of the 53rd week in 2009, G&A is up $7.2 million or 11.7%.

The $7.2 million increase versus the prior-year quarter was due primarily to the higher performance-based compensation awards and incentives resulting from our strong operating performance, and the in-sourcing of certain functions, such as our online ordering platform and a call center.These are break even activities that have increased our G&A costs but have also -- but they have an offsetting increase in our revenues.

And this will continue into 2011 and beyond.

Our G&A for the full year 2010 was $210 million -- $210.9 million.

In 2011, we expect declines in variable performance-based compensation and franchise awards.

However, these declines will be more than offset by an additional $9 million in incremental G&A expense for in-sourced functions, which has the offsetting increase in revenues that I previously mentioned, and to a lesser extent, expansion of our international infrastructure and other strategic investments.

So we currently expect the full year G&A expense to be up by around $5 million from 2010.

The projected full year G&A spend will be fairly even throughout the year.

The expense can vary up and down by a variety of funds, including performance versus plan that affects bonus and awards expense.

Regarding income taxes.

During the fourth quarter we had a lower effective tax versus the prior-year quarter due primarily to the lapse of statute -- state statute of limitations and the benefit from changes made to our overall tax structure.

We expect that 38% to 39% will be our normalized effective tax rate for the foreseeable future.

Lastly, our net income as reported was up approximately $600,000 or 2.3% for the fourth quarter.

The increase was primarily the result of our improved operating performance and lower interest expense, partially offset by the comparison to large gains recorded in the fourth quarter of 2009 related to our debt repurchases and the extra week of profits in 2009.

Our fourth quarter diluted EPS, as reported on a GAAP basis, was $0.39 or $0.40 when adjusted for items affecting comparability.

The $0.40 as-adjusted EPS figure is a $0.10 or 33% increase from the $0.30 in the fourth quarter of 2009.

Here's how the $0.10 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 average debt balance, benefited us by $0.02 in the quarter, and we benefited $0.01 from a lower effective tax rate.

Offsetting these amounts was a $0.02 negative impact resulting from a higher diluted share count due primarily to our higher share price.

Now turning to our financial position.

We ended the quarter with $47.9 million of unrestricted cash.

Free cash flow continued to grow from $78.4 million in 2009 to $102.9 million in 2010, or an average now of almost $2 million a week.

In fiscal 2010, we utilized some of our available cash to repurchase $123.9 million of principal on our fixed-rate notes at a purchase price of $116.1 million resulting in a $7.8 million of pre-tax gains.

During the fourth quarter, we repurchased at a slight premium $23.5 million of principal of our subordinated notes, for a total pre-tax loss of approximately $765,000.

Also , we reactivated our share repurchase program during the fourth quarter as we repurchased and retired 343,000 shares of our common stock under our open market share repurchase program, for a cost of $5.4 million.

Or an average price of $15.64 per share.

Basically, it's a reflection of our confidence in our business, as well as the fact that the market has clearly gotten comfortable with our debt levels as we have reduced leverage.

We are very comfortable with our debt levels.

We have met and exceeded our key financial covenant, and are currently in a position that would allow us the flexibility to extend our current attractive financing through April 2014, or give consideration to refinancing opportunities.

In 2011, our intention is to continue to utilize our free cash flow for the benefit of our shareholders by opportunistically buying back debt and repurchasing shares of our common stock.

In line with this intention, in January 2011, we repurchased and retired 241,000 shares for $3.9 million, or $15.92 a share.

In closing, we are very pleased with our fourth quarter and our fiscal 2010 results.

We will remain focused on driving shareholder value through improving our operating performance, growing our global store base, and appropriate utilization of our free cash flow.

Thanks for your time today, and now I will turn it over to

Thanks Mike.

As I look back on the fourth quarter, I see the continuation of many of the themes we've talked about every quarter in 2010.

Yes, we turned 50 years old, but we are a new Domino's.

And we are well positioned for the near future based on the excellent work we did last year.

2010 was a banner year for many reasons.

One reason in my mind what is the fact that we hit $6 billion in system-wide sales, a new milestone for us.

This was due to the excellent domestic and international sales we drove in 2010, as well as the tremendous international store growth we produced.

On the sales side, I am pleased that we posted another quarter of solid comps in the US, despite rolling over a positive comp from the fourth quarter of 2009.

And we drove annual same store sales of nearly 10%, a record for us domestically and quite a fitting end to an amazing year.

The performance of our international business was no less impressive.

Closing out 2010 with a positive 9% comp for the fourth quarter.

This division has now produced positive sales comps every quarter for 17 straight years.

International same-store sales comparisons accelerated sequentially every quarter this year, resulting in an annual sales increase of 6.9%, above our stated long-term outlook.

We also had an exceptional year for store growth.

After 2 years of negative store growth, we saw positive store growth in the US in 2010.

This demonstrates growing confidence from our franchise base and supports the expectation for further store growth in 2011.

Internationally, we had a tremendous year for store growth as Mike mentioned.

It was our biggest year ever.

We are positioned for strong growth in 2011.

We thought that cycling over the incredible store growth in 2009 might be tough, with the Spain conversion included in our net growth numbers.

But this business has proven its strength and vitality time and again with a base of strong operators driving that growth.

In 2010, our international business grew at this pace because our consumer proposition is compelling, and our store level economics our exceptional.

Which is why we continue to believe that our international business is best-in-class in the restaurant industry.

As the US business cycles over some tough sales comps in 2011, I believe that the business is in a good position due to the new higher overall base of business we built in 2010.

Based on our current feedback and reporting from franchisees, 2010 marks the second consecutive year of improved franchisee unit level profitability.

This means a healthier franchise system that's better positioned to grow and invest in 2011 and 2012.

Some of that improvement is reflected in our reversal of trend and store growth for 2010.

One notable example of franchise health is our recent sale of 26 corporate stores in Minneapolis to a strong and aggressive franchisee with operations already in the area.

No stores will be closed as a result of the sale, and in fact, he is looking to grow in this market in future years.

The sale was final in mid February, and shows that franchisees with a good business history and stable banking relationships can get financing for growth in our current economic climate.

Part of the success of our strong US business for the year was due to our continued increase in traffic.

Our traffic continued to be up in the fourth quarter compared to the fourth quarter 2009.

We believe this is driving much of the pizza category, which, as a whole, also saw traffic increases in the quarter.

Traffic remains a strong indicator for the kind of organic and sustainable growth that has a meaningful impact for Domino's pizza and the category.

We've had 2 entire years of positive traffic, and that's going to continue to be key for our growth in 2011 and beyond.

And one pivotal part of our traffic and sales growth is, of course, technology.

We worked hard to improve our e-commerce infrastructure even more in 2010.

We brought all of our online ordering, call centers, and backend operations in-house during 2010, meaning we now have better control over this than we did with third-party vendors, and we can be more agile with development going forward.

We also had a memorable milestone in 2010, exceeding $1 billion cumulatively in online ordering sales in the US since it first launched nationally in 2008.

This is a number that continues to grow.

About 25% of our sales now come through online channels in the US.

We know some international markets that had an earlier jumpstart on online ordering who see 40% and more of their sales coming via the online channel today with expectations that this will grow further, as online ordering becomes as common as ordering over the phone.

We know we will see that trend expand in the US too, and we are now well-positioned to handle that growth.

Globally, we did approximately $1.3 billion in e-commerce in 2010 alone.

Another strength of our business is our size.

The critical mass that gives us advantages over other smaller competitors.

Certainly in technology where our sophistication levels can help drive consumer behavior.

Our volume also results in larger advertising funds, both domestically and for our larger master franchisees abroad.

And especially in an environment of rising commodities, our scale puts us in a much better position to leverage our volume for better prices on our inputs.

This large player advantage has been demonstrated recently in some industry consolidation in the US, with several regional firms declaring bankruptcy or showing signs of weakening.

Now, with the phenomenal comps we posted in our domestic division last year, I know there is extra focus on how we are going to cycle over them in 2011.

We have been preparing for this throughout 2010, and we are ready to take on the challenge.

We have a robust marketing calendar for the year, and expect to have another year with a high level of weeks on-air.

We will also continue to have a strong presence in online marketing, e-mail and mobile marketing, as well as local media programs.

We have a strong product pipeline that will allow us to continue to deliver new product news, which we know is compelling to consumers.

Plus, we are continuing to improve our carry-out business, something that we started focusing on more in 2010.

We put training and operational focus on the in-store customer experience.

We have run some national carry-out special weeks that have been very popular with consumers.

We will continue to refine this business channel and as the value proposition and sales opportunity are very attractive.

Our consumers tell us that carry-out a purchase is an incremental occasion for them, so we don't believe we are cannibalizing our delivery business.

So in case anyone forgot, I will remind you that we posted a 14.3% US same-store sales comp in the first quarter last year.

We certainly haven't forgotten .

It's a pretty extraordinary phenomenon in the industry, and it happens about once in a blue moon.

So do we expect to post a negative sales comp in the first quarter of 2011?

Yes.

But although we are very proud to have posted a number like last year's Q1, and yes, we made sure we told everybody about it, what's really more relevant is that our average unit volumes are now at a significantly higher level than they were prior to 2010.

We created a dramatic shift in our business, and we are working off a much higher base from which to grow.

So my message is this.

Don't focus too much on a first-quarter domestic sales comp.

Look at the overall sales volume and profitability of the business.

We have a new level of customer loyalty and brand equity that makes us very optimistic about our future.

And focus on our robust and high growth business internationally.

This division of excellent operators and smart marketers results in a dynamic business that produces strong sales and store growth rates.

The international division is well on its way to becoming as large as the US in terms of store counts and global retail sales.

We expect continued growth in 2011.

I'm also happy to report that we completed our search for the right candidate to head our international business, taking over for Mike Lawton.

Last week we announced the addition of Rich Allison to our team as Executive Vice President of Internationals.

He comes to us from Bain & Co., which I'm sure most of you know is one of the leading business consulting firms around.

More importantly, he was a partner and he was co-leader of their restaurant practice.

His experience in improving the businesses of many major global restaurant chains is a perfect fit for the Domino's global team, and we are absolutely thrilled to have him onboard.

He starts officially on March 14, and he and Mike will be working to make a quick and efficient transition.

Also our 4 publicly traded international master franchisees recently reported earnings, and once again they show that they are truly top notch organizations, with strong sales and store growth results.

Domino's pizza UK and Ireland reported same-store sales increase of 11.9% for 2010.

They had an amazing 63% increase in their online sales over the previous year.

This online sales increase was due to the introduction of an iPhone app and increased social media activity.

They opened 57 new stores and closed none.

A phenomenal accomplishment in today's global economy.

India recently reported third-quarter earnings and continued to demonstrate their tremendous growth rate.

With exceptional same-store sales growth of 35.7% and 25 new stores opened in the quarter.

The Australia and mainland Europe master franchisee recently reported its half-year results.

They posted a same-store sales increase of 10.9% in Australia, and New Zealand, and a 4% increase -- 4.7% increase for Europe.

They opened 23 stores and the reported they are on track to open 50 to 60 stores for their fiscal year.

I will say our master franchisee for Mexico and Colombia reported on their earnings call last week that due to the launch of the inspired new pizza in Mexico, traffic was up over 25%, and new customer counts were up 20%.

These four companies who a year in 2010 represented 55% of our international store count provide excellent insight into our international business today, and what has made it such a success for so many years.

Now turning for a moment to our balance sheet, our mantra here is keep it flexible in order opportunistically maximize shareholder returns.

Our plentiful free cash flow is the hallmark of our franchise model.

We have always been committed to using that cash flow to benefit shareholders.

Our capital expenditures are low, and our business is one that works well when leveraged.This year we've used our cash flow to benefit our shareholders through debt buybacks which were earnings accretive, and put us in a strong position to refinance our debt in the coming years.

And as Mike reviewed, we also used our existing open market repurchase program to buy in shares as the cost of our debt became more expensive.

This is yet another demonstration of our focus on using our cash opportunistically.

And the fact that our debt was trading at a premium to par, during the fourth quarter of 2010 is a reflection of the confidence the market has in our ability to operate with our existing levels of debt.

In closing, I'd like to wrap up 2010 with a big thank you to all of the franchisees, store managers, and team members around the world who helped to drive one of our biggest years of sales and store growth increases ever.

Thank you.

With that, I'd like to open the line for

(Operator Instructions) Mitch Speiser with Buckingham Research.

Great, thanks very much.

To start off, Patrick, can you give us a sense, about 25% of your sales now in the US our online orders.

Can you give us a sense, breaking that down, what the mobile ordering piece is, and are there any initiatives on tap to drive the mobile ordering that we are seeing in many of your franchisees outside the US?

Yes, thanks Mitch.

The answer is, mobile orders as a percentage of the total in the US are still relatively low compared to the online sales.

There are going to be more initiatives coming, stay tuned on that.

But what we are seeing, particularly with our business in Asia, in places like Japan and South Korea, is that we are seeing the mobile ordering becoming an increasingly large part of that business.

So, more to come on that front from us domestically, but clearly while it's still relatively small compared to online, it's going to be a big source of growth going forward.

Great.

And if I could ask a question about the balance sheet.

Yes, you have resumed share repurchase.

When we think about 2011, any guidance on how we should think about the percentage of cash flow that may go to debt paydown versus share repurchase, or is it just very open-ended at this point?

Yes, I think the answer, Mitch, is we are going to be opportunistic.

The fact is that the market has voted pretty clearly on our debt.

It was trading up to as much as 103, and you're looking at our senior debt with a coupon rate of 5.3% on it.

So, when you have a 3% premium on 5.3% debt on the senior, it's not terribly attractive for us to be buying that in, at least as much, as it was when we are buying at a discount.

And so the market clearly voted, they are comfortable with where we are on the debt.

And as we looked at it and said -- what is going to generate the best return for our shareholders, it became pretty clear to us in the fourth quarter that buying in our stock was going to be a better use of cash for our shareholders than buying in debt.But the answer, at the end of the day, is we are going to be opportunistic.

It's something we are looking at ongoing based on the pricing on both, and depending on where the pricing is over the course of the year, that's what's going to guide our use of cash.

Great.

And my last question is on the outlook for same-store sales.

In particular, with costs, we all know, up pretty significantly, do you expect your franchisees to take any pricing whatsoever?

Or how do you look at the pricing environment?

Do think you can maybe lower discounts, are you just going to focus maybe on building the average check?

Can pricing be directly taken in this environment?

If you can give us some of your thoughts on maintaining the average check, and pricing in particular.

Yes, I think the answer, Mitch, is first of all, Mike said in his comments that our best estimate right now is that commodities will be up 3% to 4% for our basket of goods versus last year.

That's pretty consistent with what you have been hearing from our peers in the industry.

We will see as the year plays out.

But a 3% to 4% increase in commodities is about a 1% food cost hit for our system.

So basically, what you're looking at, to keep margins consistent with the prior year, is you'd have to find a pure price increase of about 1 point to offset that kind of number.

So, we are looking at all sorts of things with our system.

Are there ways to be smarter with the coupons we have out there?

Are there price increases that can be taken?

We are starting to see some of the folks in the category, not as much in pizza, but certainly within the QSR category, some folks taking a little bit of price, and that's certainly something we are going to look at as well.

Consumers still want value, and we want to make sure we are providing them with the right value.

But with the sorts of increases we're looking at right now, you are not looking at a big issue at this point.

We will see as we go forward.

Thank you.

Alvin Concepcion with Citi.

Good morning.

First off, congratulations on a great year.

Thank you.

I know you mentioned you expect a negative sales comp in the first quarter due to self compares, but could you provide some color on sales trends in January and February.

Were there any weather impacts or any other issues that stick out?

Yes, we generally don't get into results within the quarter, but I would tell you that weather is really, overall within a quarter, is almost always negligible.

It will affect one region for a couple of days, but as you look at the overall quarterly results, it just doesn't play that big a factor in the results that you get.

So I think the takeaway on the first-quarter results is, look, we are rolling over a 14.3%, and that's not an easy thing to do.

There was a lot of initial trial last year.

New customers being attracted in to try this new pizza.And you saw a more normalized level of business that was being driven by repeat and frequency in the last three quarters of the year.

So first quarter was pretty unusual at 14.3%, and as well as the result of this initial burst of trial we saw in the first quarter last year.

So was that hard to get over?

Yes.

But what we are seeing and saw through the balance of last year was business that was driven by increased loyalty because of this new, better pizza.

And that's something we are confident is going to continue, and that we can build on from here.

Great.

And you mentioned you have a pretty robust marketing calendar, which could help drive sales momentum this year.

You probably don't want to give too much away regarding your specific marketing plans, but could you provide any more color on that, and perhaps what the general focus will be?

Sounds like value might still be a big focus; just wanted to see what you're thinking there.

And also, the timing on any major campaigns.

Well, we are launching chicken this week, or I should say relaunching chicken this week.

So that's the big news.

And so you're going to see that in the near term.

We have had chicken for a while.

We have had chicken for well over a decade, but we haven't talked about it for nearly a decade.

And we think we have a better chicken product that we are coming out with, both on our wings and our boneless.

We think it's a great way to bring more people into the franchise, but also to increase the add-on sales, which by the way is one of the ways you can offset commodity increases.

If we can drive some ticket through upselling chicken to our existing customer counts, our existing customers coming in, it's a great way to offset some of the cost pressures on the business.

So that's the big news, but I think I've said before, and will repeat, the wonderful thing about 2010, or I should say on the long list of wonderful things about 2010, was the fact that the news of the new pizza really carried us through the entire year, which give us an opportunity to build up our pipeline of new products as we needed them.

And so, the chicken that is launching right now, we think is the first of those.

It's a great way to bring a little bit more energy into the chicken that we have been selling in our stores.

And hopefully is going to drive an increased incidence rate, and a little bit of a higher ticket, which is going to help with the modest commodity pressures we're seeing.

Thanks for the insight on that.

And one more question.

I know you mentioned a focus on carry-out.

Historically in periods of rising fuel costs, is there a higher propensity for customers to order delivery, and if so, how does that impact your strategy there?

Yes, it's an interesting question.

Actually, we went through that pretty heavily in 2007 into 2008.

And the answer is it really didn't change customer behavior much.

Higher fuel costs will affect the cost of delivery for us, but it did not affect the consumer behavior.

Okay, great, thank you very much.

Joe Buckley with Bank of America, Merrill Lynch.

Two questions.

I appreciate the commentary, at least directionally, on the first-quarter sales.

For the full year, do you think you are capable of driving positive same-store sales growth?

Joe, we will go back to our long-term guidance that we have always given, which is, we believe we can grow our domestic comps 1% to 3% over the long-term.

That's not a specific projection for this year, but that's the kind of growth that we think we can generate on an ongoing basis.

The way I think I would think about it is, we've built a new higher level of sales for Domino's last year, and that's a base that we do believe we can grow from.

So we're not going to get into specifics for this quarter, or the individual quarters or for this year, but our long-term guidance of 1% to 3% is unchanged.

Okay.

And then just a question on taking the online ordering and the call center functions in-house, just talk about the advantages of doing that, and the timing of when that occurred.

Yes, the timing is, it really occurred in about the third quarter, late third quarter.

So it was part of the G&A move that you saw in the fourth quarter, was those being brought in internally.

It's a wash from a P&L standpoint, so there was offsetting revenue that our franchisees are paying.

We are basically running that at cost for us.

So it has no P&L impact.

The answer on that is, we have used outside vendors for this in the past, and we decided that it is really critical, it is a core competence for us moving forward, running this right, developing and creating more and more competitive advantage.

We think it is another important reason why Domino's and probably frankly other larger chains in the pizza category should do well, not only growing their overall business but growing their market share as we go forward.

Because it is very difficult to duplicate the kind of experience that we are creating for our consumers.

So it gives us the ability to move quicker, to be a little more nimble as we are rolling out new initiatives.

It was essentially a cost wash for the way we were operating before to now.

And is a wash for us from a P&L perspective.

And it also gave us the ability to build more redundancies into the system, so that we are going to have more and more consistency of the system always operating, and it was a flawless launch.

Our folks did a terrific job; we didn't have outages.

And it's just a platform that we are going to continue to build on, not only for online orders themselves, but as we move more and more into mobile and into other platforms for taking orders, we decided that controlling that and building that ourselves was going to be a core competence and a core competitive advantage for us.

Just to clarify the offsetting revenues, is that because the Company and the franchisees were paying for these services to the outside vendors, and now instead the franchisees are paying you for those?

That's exactly right.

So in the past, it didn't touch our P&L because the franchisees were paying directly for -- it came through, but it was a pass-through on the fees that they were paying to this third party.

And it was basically an offsetting expense.

As we looked at bringing it inside, we needed to change the way we are accounting for this.

It's now an expense on our books, and is a revenue on our books, but it is a straight wash from a P&L perspective.

Okay, and just one more.

Just in the 3% to 4% food cost inflation, what are your cheese expectations?

How covered are you on your cheese needs for 2011 at this point?

Yes, so the forward curves and looking at about three different sources right now have cheese actually easing a little bit through the rest of the year.

We are at almost $2 right now.

And so our expectation is that we are going to see a little bit of easing.

To give you on cheese, we've talked about this in the past, we have a contract in place that basically reduces the volatility on cheese moves by about one-third.

So about two-thirds of increases or decreases in cheese are passed through to our system, about one-third of that volatility does not come to us, and does not come to our stores.

So that has not changed on the cheese in terms of how that's fixed and locked in.

Other commodities, we do have more locked in.

Okay, very good, thank you.

John Glass with Morgan Stanley.

One follow up.

First, in your change in ad spending in 2011, your growth in ad spending, is that simply the growth of the business overall, or are you reallocating among either greater national participation, for example.

And can you talk a little bit about, since you are getting such great success in online ordering, are you able to switch more of your advertising to online, and does that save you money ultimately in advertising?

Yes, it does.

I'm sorry, the first question, you were saying just in general ad spending?

In the past you've ratcheted up the amount of your ad spending as a percentage of total, and allocated more to national, and that switched back and forth over the years.

Is there any change in 2011 versus '10 on that front?

No, there's not.

Can you quantify the amount you might be able to save over time through utilizing more online advertising versus traditional media?

No, I think the answer on that is, I'd expect that the spend will be comparable to what we have done, and that we are just going to get a better ROI on it.And we have seen that.

Our marketing spend online works very effectively and efficiently for us, and so we have had some shift that direction.I'm not going to get into the exact amounts on that for competitive reasons, but it is very efficient and it works well.

Okay, and you've talked many times about liking the fact that the Company is comfortable with a high degree of leverage.

If you had to handicap it now though, do you simply refinance your existing debt, or do you actually add additional leverage to go back to where you were, say at the time of the original recap?How do you feel about those two, that decision, and also just the decision -- rates aside, traditional bank and bond debt, which is more tangible and understandable maybe from an investor standpoint, might allow you to pay a dividend, versus the securitization, which is a little bit more opaque perhaps to an equity investor.

Yes, so I'm not going to get into the specifics on what will happen with the refinancing in the future, because that's obviously going to depend on market conditions at the time.

And at that point, we will make decisions about the best approach to our balance sheet.

But what I will tell you is, I'll spend lots of time explaining ABS structures if it saves us a bunch on interest expense.

So the ABS deals that have been done recently are being done at a lower interest rate than the bank and bond deals that are being done.

And we are very comfortable with the ABS structure.

It's something that we have been living with now for a few years; it's worked well for us.

And I definitely will take the trade-off of lower interest expense and a little bit more explaining, than higher interest expense that is easier to explain to the market.

And does the ABS structure preclude the ability to pay regular cash dividend, or are their structures that might allow that to occur, too?

No, we can do it under the ABS structure.

Thank you.

Jeffery Bernstein with Barclay's.

Great, thank you very much.

A couple of clarifications.

One, Patrick, I know you mentioned the 3% to 4% basket essentially would require, if you were just to take straight price, like 1 point of price.

I'm just wondering, can you talk a little bit about -- I mean the $5.99 promotion you pretty much ran all of 2010, the success you had there.

I know you tried pushing it up to $7.99 with, I don't know, some toppings.

Can you talk about your thought process?

I think I've seen the ads now over the past couple of days back to the $5.99, whether that remains a main stay or whether you ease up on that, whether you saw some push back with the $7.99; I'm just trying to figure out flexibility from a customer standpoint.

Yes, Jeff, we are constantly testing offers, and looking at what is most compelling to the consumer, but also importantly, crossed off with what's going to drive good profitability for our stores.

And we want to maximize not only the traffic growth we are getting, but we want to make sure that we are continuing to increase store level profitability.

We are proud that we accomplished that each of the last two years, and it is something we want to continue to do for the overall health of our system.

And frankly because, from a practical standpoint, if we drive improved profitability in the system, that's probably going to generate store growth as we go forward.

We are very focused on that, we continue to test on that, $5.99 worked very well; it is something through all of last year, and we have continued to run it into this year.

It's something that we are always looking at, but the beauty of this business is there are a lot of pricing levers that you can pull.Even when you do the $5.99 national price point, the fact is that still is a minority of your orders.

The vast majority of our orders still don't come on that national price point.

And we have the ability to fine-tune the other coupons that are out there, along with the national price point, to get the right balance to drive not only traffic growth, but profitability in the stores.

Okay, and then as a connection to that, Mike mentioned the 3% and 4% basket of inflation.

I know you gave some color on the cheese component, and in the past you guys have said you had some pretty good coverage on cheese.I'm wondering if there is a percentage that's lost on the cheese, and then with the meats and other things being a significant component, what percent is lost, and what's the assumption for the portion that's not lost in terms of what is in that basket?

As Patrick said earlier, cheese is actually not locked.

The agreement that we have with our supplier reduces the volatility of cheese, so that as the price goes up, we absorb about two-thirds of the block price increase.

There is not a cap, there is not a collar, there is not a lock at all on cheese.

Meat prices also have a great tendency to fluctuate with the market.

Some of the other commodities that we buy that are of lesser importance, we have either -- that we have fixed prices with our suppliers.

That would include chicken, we also have wheat locked down for the year.

We also have sauce locked up for a large portion of the year.

But cheese being the biggest component is not one that does not have a lock on it.

Okay, and the assumption for the cheese is that prices ease as we move through the year, and then the meats, other than chicken, that you're not locked on that either?

That is correct.

Meat prices, which are primarily toppings for us, are not locked, but chicken is.

Okay, and just lastly, Patrick, you mentioned gas prices haven't had an impact on consumer behavior, obviously it has an impact on the franchisees P&L.

I know in the past that got a lot of attention in terms of franchisees, some conservative, some being more aggressive on incremental delivery charges and whatnot.

What was the big take-aways from a few years ago when you dealt with this?

Is that anything that is in your control, or what is the likelihood to happen with gas prices heading higher like this, on the fee side of things?

The direct impact of the higher gas costs are not that big on the P&L.

You're looking at a small number when you look at the gasoline reimbursement as a percentage of sales on the store P&L.

We don't like it, obviously, we would rather have lower gas costs then higher gas costs.

But what we saw, thee, four years ago now, was the way it played through in commodities, and I think we're seeing that again, and that's a bigger deal.

So the answer is, there are ways to offset it.

It's pretty easy for our system to do the calculation on what their reimbursements need to move, to make sure we are doing right by our drivers.

And move that through to the consumer, if it goes into the delivery charge.

But honestly, a far, far bigger deal than anything we are talking about here was when minimum wage moved from $5.25 to $7.25.

That had a far bigger impact on our overall P&L, on the change in profitability, and what we needed to do from a pricing standpoint, both with delivery charge or with our balance on coupons and that sort of thing.

Gas prices moving up is not a great thing, obviously we don't like it.

But on an order of magnitude, it's pretty small impact on the overall P&L.

Okay.

Thank you very much.

John Ivankoe with JPMorgan.

Listening to some of your commentary, I guess both today and from the analyst meeting, it seems like online ordering in some countries has probably gotten to the point, the tipping point were store labor can actually be reduced to some degree.

I'm wondering if that's true, and whether you are beginning to approach that type of threshold in the US, for example, that labor that you have at the store can simply either, A, go down in terms of number of hours worked, or B, be reallocated to other things that might improve customer service or speed of service.

Yes, you have that exactly right.

And we are in that range now where you start to feel that a little from an efficiency standpoint.

And as we've said before, online ordering is a terrific thing for a long list of reasons.

One of them is, there is some labor efficiencies as you get into the kind of range that we are in, when that many of your orders are starting to come in, particularly in the middle of a rush on a Friday or Saturday night, it impacts you more.

If you are on at lunch on Tuesday and it's relatively quiet, your labor is already there, and so it's not going to affect that, but it may on a Friday and Saturday night.

But online orders have a little bit higher ticket, they buy more of other products on the menu.

The order accuracy is higher, which is part of why customer satisfaction for those customers is higher overall.

So it's good for the top line directly, it's good for retention of customers and customer loyalty over the long-term.

And to your point, we are at the level of sales where you start to feel it a little bit on your efficiencies within your store as you use labor.

Thank you for that.

I'm not sure if I have heard -- again, it's a recurring theme on the call.

What spot price are you assuming in your -- I'm going to ask the question as directly as I can.

What spot price are you assuming for cheese in fiscal '11, given the fact that we are at $2 now.

I know you said lower, but how much lower is it?

I think the consensus forecast out there right now for cheese are in the $1.70 to $1.75 range.

So what you're looking at is a $0.25 to $0.30 move, and I think we have said in the past, a $0.40 move in cheese is equal to 1 point at the store level P&L.

Right.

So what you're looking at is, best guess is about 0.5 point of easing from where we are today.

But obviously, it's been a moving picture out there the last four to six weeks, but order of magnitude, if 3% or 4% up on total commodities is around 1 point.

If cheese stayed right where it is, you would be looking at about another 0.5 point, is the way to think about it.

If the consensus is wrong, and it stays where it is, as opposed to backing off, that's about 0.5 point.

Now, just as a reminder though, while that's very important to us, it's very important to our franchisees into our overall system.

Remember, we are over 90% franchised domestically, we are 100% franchised internationally, and I would point out I have been assuming that all the questions we are getting our domestically focused.

And that's the way we have been answering them, but remember we are quickly approaching being 50/50 on this.

That's great color, thank you, Patrick.

Yes.

Michael Wolleben with Sidoti & Company.

I just wanted to touch on the international segment here.

Can you give us a little more color here on where the infrastructure stands to support this growth that you guys are putting up here now with about 350 units a year.

Are you guys pretty much fully built out as far as support functions for that growth?

When you're getting 350 net up in a year, you're adding some overhead.

But we are continuing to get leverage on that overhead as we continue to grow, but we are generating just an astounding rate of growth right now, frankly.

Getting almost to the store a day level last year was a pretty extraordinary year, given that there were no material conversions or anything in there.

That was straight organic growth.

So we are going to continue to add overhead into the international business to support it, but that overhead is going to continue to get leveraged as that business grows.

Can you give us an idea of how much incremental spending you're expecting here in '11, or an idea of the incremental margin that you guys are seeing off these increased revenues.

Anything in that way would be helpful.

We have given the overall number on G&A, which is up -- we are projecting to be up $5 million last year, so obviously the number is included within that.

Most of the additional spend is coming from people.

This is not that we are putting lots of -- a significant amount of capital behind this business, this is from additional headcount.

And it's included within that number.

So obviously while not insignificant to the international division on an overall basis, it's covered by the $5 million.

Okay, and then just lastly, where do you guys see the percentage of operating income from that international segment being over the next two to three years?

If you were to refer to the 10-K, you'll see that there is two significant components to the revenues and profits of the international division.

There is a distribution business in Canada, Hawaii, and Alaska, that has a profit margin that is significantly different than the profits on royalties that are generated by the business.

So I would have to refer you to that specific part of the statements, and take a look at that to try to make your estimates for the next two or three years.

Because that product, that mix of revenue will have a dramatic impact on the percentage that you may want to look at.

Okay, great, thanks.

Thanks, Michael.

We have reached our allotted time for questions.

Are there any closing remarks?

Yes, there are.

Thank you.

I really want to thank all of you for participating in today's call.

It was a tremendous year in 2010, and closed out our 50th year really with phenomenal success.

We are looking ahead to another 50 years for this business, and I couldn't be more excited.

It will be year 1 of the new Domino's.

Thanks again, and I look forward to sharing with you the results from our first quarter on May 5.

This concludes today's conference.

You may now disconnect.