達美樂 (DPZ) 2011 Q3 法說會逐字稿

Good morning.

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

At this time I would like to welcome everyone to the third-quarter 2011 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)

I would now like to turn the conference over to Ms.

Lynn Liddle, Communications and Investor Relations.

Thank you, Ms.

Liddle; you may begin your conference.

Thanks, Carry, and welcome, everybody.

I will start with a little bit of housekeeping and turn your attention to our Safe Harbor statement contained in our 8-K and our 10-Q this morning, in the event that there are any forward-looking remarks in today's conference.

I also would ask the media to please be in a listen-only mode, as the question-and-answer session is primarily set up for our investors and sell-side analysts.

Today we are going to have some prepared remarks followed by Q&A.

With us on the call we have our President and Chief Executive Officer Patrick Doyle, as well as our Chief Financial Officer Mike Lawton.

We will begin this morning with comments from Mike.

Thanks, Lynn, and good morning, everyone.

We continued to drive strong results in the third quarter, further proving that our strategy is working both domestically and internationally.

We used our cash to benefit our shareholders through our share repurchase program this quarter and continued to drive shareholder value with 30% adjusted EPS growth.

During the quarter, we announced that we postponed the early refinancing of our existing debt due to the volatility in the financial markets.

As a reminder, our debt allows for two extensions of interest-only payments until April 2014, if we meet one key financial ratio, which we currently exceed.

In the meantime, we will continue to monitor the financial markets and provide any appropriate updates.

Our commentary regarding any refinancing will be limited only to these introductory remarks.

So now let's dive into the third-quarter results.

Our global retail sales, which are the total retail sales at franchised and company-owned stores worldwide, grew 9.1% during the quarter, excluding the impact of foreign currency.

When including the positive currency impact, our global retail sales grew at 13.3%.

Looking at the drivers of the global retail sales growth, our domestic same-store sales grew a healthy 3% in the third quarter, lapping a very successful quarter in 2010 when we were up 11.7%.

This yielded a very strong 14.7% two-year same-store sales comp for the quarter.

Broken down, franchisee same-store sales were up 2.9%, while company-owned stores were up 4.2%.

International had another outstanding quarter as same-store sales grew 8.1%, which was lapping an impressive quarter in 2010 when we were up 7%.

In the quarter, we closed a net three stores domestically, made up of 12 store openings and 15 closures.

Our overall store growth in the quarter was solely generated by our international division, which grew by a net 108 stores.

Year-to-date, we have opened a net 190 stores worldwide.

This quarter we announced the sale of 30 company-owned stores in Atlanta to four local franchisees.

These transactions resulted in a net positive impact to pretax income of approximately $500,000.

The details of these transactions are also outlined in our items affecting comparability in our 8-K that we issued this morning.

Turning to revenues, our total revenues for the third quarter were $376.3 million, a $28.9 million or 8.3% increase from the prior year.

Approximately $20.6 million or 71% of the total revenue increase was attributable to our supply chain division, largely due to higher commodity costs versus the prior-year quarter.

The increase was also attributable to higher international revenues resulting from same-store sales and store count growth, as well as the positive impact of foreign currency exchange rates due to the weaker US dollar.

Further, our domestic franchise revenues increased due to higher same-store sales and the benefit of fees paid by franchisees for the in-sourcing of services, including online ordering and a call center.

As mentioned on previous calls, we also incur an increase in G&A expenses for the in-sourcing of these initiatives, which we provide on a breakeven basis to our franchisees.

Partially offsetting these revenue increases were lower company-owned store revenues from the sale of company-owned stores during both the first quarter and third quarter of 2011.

More detail regarding our revenue by business unit can be found in our 10-Q which was filed this morning.

Moving on to our operating margin, as a percentage of revenues our consolidated operating margin increased 0.4% from 27.1% to 27.5% quarter-over-quarter.

This was due primarily to a change in our mix of revenues attributable to fewer company-owned stores, and increased franchise revenues, and an increase in company-owned stores' operating margin.

This was offset in part by a lower supply-chain margin percentage, which was impacted by higher commodity prices.

As a percentage of revenues our company-owned store operating margin increased 2.6% from the prior-year quarter due primarily to labor efficiencies and lower insurance expenses, offset in part by commodity price inflation, including cheese and meats.

Labor efficiencies gained were primarily the result of growth in our carryout business and a reduction of labor hours per transaction versus prior-year quarter.

Wage tip credits had minimal benefits to us in the quarter versus the prior-year quarter, and we anticipate the impact will not be material in future quarters.

Looking at insurance expenses, in the third quarter of last year we incurred higher expenses related to the adverse development of certain claims.

In subsequent quarters we returned to a normalized expense level.

Now let's move on to our supply-chain margin, which decreased 1.4% from the prior-year quarter mostly due to the impact of higher commodity cost.

With food commodities priced on a constant-dollar markup to our franchisees, note that increases in commodity cost do not impact our supply-chain dollar profit.

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

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

The average cheese block price in the third quarter was $2.08 per pound versus $1.53 per pound last year, which drove an over 8% increase in our market basket in the third quarter.

By the end of the third quarter, the cheese block price did come down to $1.79 per pound from its third-quarter high of over $2.10 per pound, but still remains above historical averages.

We anticipate the price during the fourth quarter to be around the same range that we are in today.

We continue to expect our overall market basket for 2011 to be 4.5% to 6% over 2010 levels.

Turning to G&A expenses, G&A increased by $1.6 million or 3.4% quarter-over-quarter.

When you exclude the $500,000 impact from the sale of company-owned operations, G&A was up $2.1 million or 4.5%.

This $2.1 million increase was due primarily to the additional expenses that we incurred for in-sourcing certain services, including online ordering and the call center that I previously mentioned.

Regarding income taxes, during the third quarter we had a slightly lower effective tax rate due primarily to wage-related credits.

However, we continue to expect that 38% to 39% will be our normalized effective tax rate for the foreseeable future.

Our net income as reported was up $5.5 million or 33% for the third quarter.

This increase was primarily the result of our strong domestic and international same-store sales growth and international store count growth.

Our third-quarter diluted EPS was $0.36 as reported on a GAAP basis, and $0.35 when adjusted for items affecting comparability.

The $0.35 is an $0.08 or 30% increase from the $0.27 as-adjusted EPS in the third quarter of last year.

Here is how the $0.08 difference breaks down.

Our improved operating results benefited us by $0.07.

Our lower effective tax rate benefited us by $0.01.

And our lower interest expense benefited us by $0.01.

Offsetting these amounts was a $0.01 negative impact resulting from our higher diluted share count, primarily due to shares issued for options exercised, and our higher average stock price, offset by our share repurchases.

Now, turning to our liquidity.

During the first three quarters of 2011, we generated $72 million of free cash flow.

In the third quarter we utilized some of our available cash to repurchase and retire approximately 3.2 million shares of our common stock for $81.9 million or an average price of $25.87 per share.

Subsequent to the quarter we repurchased and retired an additional 92,000 shares for $2.5 million or $26.84 per share.

Including these subsequent repurchases, we currently have $115.7 million remaining authorized under our open market share repurchase program for future share repurchases.

We ended the quarter with $32 million of unrestricted cash.

In closing, we are pleased with the results in the quarter and year to date.

We will continue to focus on driving shareholder value through our operating results and use of our strong cash flow.

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

Thanks, Mike, and thanks to all of you for being on the phone today for our third-quarter earnings call.

Saw from our release this morning we announced yet another quarter of strong global sales and free cash flow generation.

At the risk of sounding like a broken record, I will open once again with the report that not only is our business doing well around the world, our franchise business model continues to provide a solid and steadfast structure on which to build.

Strong sales growth at the store level drives strong and consistent global retail sales, and results in plentiful free cash flow that we can deploy to drive shareholder value.

This in turn creates a virtuous cycle where franchisees succeed and grow around the world with an established brand; the brand's strength and market dominance increases; and we all build upon each other's success.

On average, we are very pleased with store-level profitability in our international business.

While the recent spike in US cheese prices has hurt domestic franchisee profitability in the short term, on average our franchise store-level profitability is still at a much higher level than its trough of the few years back, and we are committed to continue to focus on improving their store profits over time.

In the US this quarter we posted a positive 3% same-store sales comp versus almost 12% a year ago, giving us a two-year comp of just about 15%.

We couldn't be more proud of this performance given the tough prior-year hurdle and a still tepid overall economy.

Clearly we have established that our domestic sales success wasn't just a short-term spike from the introduction of our new pizza recipe, but a sustained improvement in our US business due to materially higher customer satisfaction, retention, and purchase frequency.

We have expanded and improved our overall menu, recognizing that great food quality is now the price of entry in this competitive marketplace.

We continue to provide value to cash-strapped, still nervous consumers.

We communicate with them in a plain, clear, and trustworthy manner.

And our operators are giving our customers great service in their neighborhoods every day.

It is a fairly simple formula laid out this way, but not at all easy to execute.

I am very proud to lead a team and partner with great franchisees whose talent and dedication has driven this continued success.

A recent example of our combined effort is the launch of our new artisan pizza line.

As its name indicates, this is a line of gourmet pizzas that we hope and believe our customers will find delicious.

Our franchisees have embraced the line, too.

The pizzas are operationally friendly and create a good profit opportunity at the store level.

This, of course, is all-important to the long-term health of the brand and to future store growth.

Specific to store count, as Mike mentioned we sold 30 of our company-owned stores to several of our franchisees in the Atlanta market.

As we have said before we are opportunistic with the sale and purchase of stores, and you will see these transactions occur from time to time.

Clearly it is our preference for franchisees to build new stores rather than buy existing ones, and we hope there will be a greater opportunity for that as the economy improves.

That being said, it is still a tough market out there for small businesses; and even more so if you are just starting out.

It has been more profitable for our stronger franchisees to buy an existing store and operate it better than to build one from scratch.

As those purchase opportunities dry up with a strengthening franchisee base, their growth will have to come from building new stores.

Turning to our international business, we continue to thrive.

It is not new news; and again I am going to sound like a broken record.

The model is working, and it is working exceptionally well.

Our international division posted positive 8.1% same-store sales growth this quarter, lapping a 7% comp a year ago, for a two-year comp of just over 15%.

This makes 71 quarters of positive same-store sales growth, nearly 18 years.

Through the third quarter, we have grown by a net 228 stores year-to-date.

International is a juggernaut that is showing broad strength across the globe.

Here are just a few highlights from the phenomenal quarter from this division.

Domino's Pizza UK and Ireland recently announced their third-quarter interim results, and same-store sales were up 4.1% after lapping 11.5% a year ago.

They opened 15 new stores in the UK for the quarter.

And they have announced they are on track to open 64 new stores for the year -- 60 in the UK and Ireland and four in their new market of Germany.

Our master franchisee in India just announced its first store opening in Sri Lanka.

Once again, our master franchisee is doing a tremendous job there, and Domino's Pizza in India continues to be a strong and dominant QSR concept in that country.

Australia recently announced their full-year results, and once again they have shown that they are fantastic operators.

Australia-New Zealand combined reported 13.2% same-store sales growth for the year; and Australia had its largest same-store sales growth in over a decade.

This master franchisee also owns and operates stores in Europe, which also had a great year, with same-store sales growth in the mid-single digits.

And a story came out of Japan this past quarter that our master franchisee had a plan to expand to the moon.

The flurry of global PR pickup on their plan proved the level of interest that now exists in Domino's.

The fact that our master franchisee subsequently postponed their plan proves that they should negotiate the franchise fee with us prior to announcing their expansion out into the rest of the solar system.

All joking aside, I think the message is clear.

Domino's international is truly a best-in-class business, and I will continue to do my utmost to convey this to all of you -- though I think the results quarter after quarter, all 71 of them, speak for themselves.

This is a model that is 100% franchised with the best operators in the QSR space, driving strong sales and store growth and doing so with a lower risk yet still high-return model.

So how does this all translate into our financials?

We have driven very robust organic EPS growth and enhanced it with the leverage we can bring by deploying our free cash flow.

We have driven some pretty outstanding results through a combination of innovation and marketing, great operations, and geographic diversity.

In the midst of a global economy that has been that challenged and volatile for over three years, our business has been resilient and even prosperous.

So in the spirit of quitting while I am ahead, I will conclude my prepared remarks and open it up to questions.

(Operator Instructions) Mitch Speiser, Buckingham Research.

Great, thanks very much.

First, on the US business, the 3% comp was solid.

Could you give us some details?

In particular, the Two for $5.99, did that run throughout the entire quarter?

Can you give us a sense of if that product mix has changed since you rolled it out about a year and a half ago?

Hey, Mitch.

Yes, it has continued to do well and it did run most of the quarter.

I think what I would say is the consistent results that we have driven with that promotion is, number one, a reflection of the way it has performed for us; of the value that consumers are seeking still.

Because clearly economy is still relatively soft and consumers still need good value.

Despite the fact that we have got a pizza that is much better than it was the past and it's clearly resonating, we have got to get them good value; and that offer does that.

But I think the other thing that it has done for us is, with some consistency around that price point, it has really allowed our advertising to make the product the king.

So the fact that we are not changing promotions every couple of months and bouncing around means that the advertising can be more focused on the quality of the pizza that we are selling and the service that we are bringing, than necessarily repeating the price point seven times in a 30-second commercial.

So overall, clearly continue to do very well for us and you see that in the results.

Great.

Did the iPhone app contribute to comps?

And can you give us an update on what online ordering is as a percent of sales in the US?

Yes, it did.

We are very pleased.

I think we put out a release during the third quarter that -- I think it was about eight weeks in, Lynn -- that we had passed $1 million in a week.

If you play that out through our retail sales in the US, that means we were already at kind of north of 1.5% of our sales just off of the iPhone app.

So it would be a little early to see just how much of it is incremental; but there was clearly some incremental sales from that.

Our total digital sales now -- so mobile sales and online ordering -- but our total digital sales now are approaching 30%.

Great, thanks.

If I can ask about the labor leverage, you received in the quarter about 200 basis points.

You mentioned labor hours per transaction are down.

Can you comment further on that?

Are there further productivity improvements to go, or is this the best it's going to get?

And just a sense of how you are able to do that while maintaining a high level of service.

I think I have to say yes, otherwise I would be taking the pressure off of our guys, right?

The answer is they did a really nice job of leveraging labor and leveraging a little bit more volume, and have really done a nice job of doing that.

We have also been running this carryout special Monday through Wednesday on an ongoing basis.

That will leverage your labor a little bit more, because there is more labor in a delivery order than in a carryout order.

But overall our corporate store guys -- Asi Sheikh, who runs that group, and his leadership group did a really nice job of gaining labor efficiencies in the quarter.

So real pleased with that.

We are now -- have rolled in the third quarter our move to tip credit in our stores.

So none of that improvement now is about wage rate; it is all about just driving efficiencies in hours.

Great.

Thanks very much.

John Ivankoe, JPMorgan.

Great, hi, thanks.

Two unrelated questions if I may.

First, just thinking about the shift to a centralized call center, I was curious to what your data has shown in terms of customer wait times.

When they still do call, it's like I guess north of 70% of people don't use online ordering.

So what the average wait time has been and average ticket has been with presumably a more sophisticated approach that the call center employee has.

So that is the first question.

And secondly, we all know that comps are a great leading indicator of development, so I was hoping to get some initial thoughts or some thoughts on international development as we move into 2012.

Thanks, John.

Yes, the first -- the call center is what I would describe as kind of a rollover call center.

So it is not that all of our phone business has shifted over to a call center.

In fact, it is a very low percentage, very, very low percentage of total orders going in there.

What we are doing is, if a customer calls the store and they are hitting what would have been a busy signal -- so basically all the lines are full, everybody in the store is already taking orders -- it rolls over to the call center.

So you are looking at a pretty incremental order because maybe they were going to call back, maybe they weren't if they couldn't get through.

But we have gotten -- our best indications and analysis of the data is that it has driven some nice incremental in those stores that are using it.

But it is still only in a minority of our stores that we are even doing that.

So we have set it up; we are still kind of expanding it.

We like what we are seeing there.

But it's a small percentage of the orders in those stores that have it, and it is still a small percentage of the stores where we are doing that.

So not a big impact yet.

Might be a nice additive thing in the future.

We just think it gives better customer service and those orders are going to be hopefully pretty incremental, because otherwise they were going to hit a busy signal.

The other was store growth on the international side based on comps.

Cash-on-cash returns at the store level are what ultimately are going to drive store growth, and you have heard me say this before.

But I see lots of press releases going out in this industry about all of the stores that are going to be built because they have cut a new contract that says they should be built.

The answer is -- I just don't buy into that.

Stores get built because they should be built.

They get built because cash-on-cash returns are good.

You use the contract as a guide, and there is certainly some leverage there if stores aren't getting built that should be built.

But overall, it is the cash-on-cash returns that are going to drive store growth.

So when comps are up as much as they are up in international, it means outlook is very good for store growth.

Thank you.

John Glass, Morgan Stanley.

Thanks very much.

I had a couple of international questions.

First, you couldn't tell it looking at the absolute numbers you reported in international; has there been any signs at all, particularly in your European-based businesses, the UK, those within Germany and France, if there has been any consumer slowdown?

And in talking to your franchisees, do you have plans in place to address the extra need for value there now, particularly this quarter, given so much has changed in the last 90 days?

Yes, I mean overall, Europe is still holding up very well.

Greece we have certainly felt it.

So at the epicenter we have felt it.

But when you look across the rest of Europe, it's actually been holding up pretty darn well.

The answer on value is the same there as it is here.

As the consumer is still fairly nervous over there, and you look at unemployment rates in Spain that are still incredibly high, and I think just a general lack of confidence from the consumer, they want value.

And so we are doing that.

We are making sure that we are sharpening our pencils on pricing; and clearly given the results I think we are getting the balance on that right.

Then just the second question in international is, can you remind us where you have rolled out the new Inspired pizza?

I think you talked last quarter about maybe it was Mexico.

Has it gotten the same -- correct me if I am wrong first.

And then, has it gotten the same sort of response you get here?

Then talk about maybe online ordering and some of the technologies.

Are those all transferable to the international business as well?

Or they are ahead of you in some cases?

Or how far behind you, if they are not?

Yes, so, Mexico is -- the only one that really rolled out the new kind of exactly the same way.

The first thing is, cheese is different around the world.

At the most basic level, mozzarella differs because cows in the US are generally eating grain; cows outside the US are generally eating grass, which gives you a different color, gives you a little different flavor profile.

And the cheese outside of the US has, for the most part, not changed.

There are a couple markets that have made some changes to it.

So, that is one part.

The second part is the sauce.

The sauce has largely changed in our international markets.

The third is the crust, and that has either changed or is an option in a lot of stores, whether or not they put the garlic butter or garlic oil on the crust.

But in terms of relaunching basically the same way we did in the US, Mexico is really the only one.

It has done very well; and that is now over a year ago since they did that relaunch.

The second part was e-commerce.

And the answer is on average we are doing about the same level of sales in international in e-commerce as we are domestically.

But the percentages vary quite a bit.

We have got markets in Asia in particular, Japan, Korea, where the percentage of digital orders are pushing 50%.

Australia is very strong.

The UK is very strong.

I would say Latin America is still somewhat lower as a percentage.

But it's available now in virtually every country.

India has launched nationally within this calendar year, and we think it is going to be a growing part of the business.

You look at technology adoption rates, and the answer is Asia has tended to be a little bit quicker.

I think UK, Australia, Europe in general is going to be probably more on a par with the US.

And I think Latin America is probably going to be a little bit behind on adoption rates.

But overall, the average is about the same outside of the US as it is in the US.

Thank you.

Jeffrey Bernstein, Barclays Capital.

Great.

Thank you.

A couple of questions.

Just first from a top-line perspective specific to the US.

Just wondering whether you can give any color.

Obviously a 3% comp lapping a close to 12% is very impressive.

I am just wondering whether you are seeing any -- when you mine the numbers are you seeing any mix between core value versus the premium?

And perhaps seeing more early week taking share with the carryout promotion.

And how the artisan test is doing with that being more premium; how did that do in test versus value?

Just trying to gauge, based on what you are seeing, value versus premium; and then I had a follow-up.

Yes.

So I think first of all, the carryout promotion has done well.

It continues to be something we are pleased with.

The Monday through Wednesday is -- those are the three slowest days of the week, and so we think that has been particularly compelling.

Particularly as people are out and about, and they can run in and grab a pizza on the way home.

So we are pleased with the way that has performed.

Artisan is not part of the third-quarter results.

In fourth quarter we are certainly optimistic.

It is good value at $7.99, but it's really about the taste of the pizza and taking the consumer to a taste profile that continues, I think, to put us really in the lead in quality and taste perceptions now in the category.

But overall, category is doing better than it has done the last few years.

Our best estimate is the category will probably be up in the range of 1% this year, which is not exactly robust at up 1%, but better than the negative that we had seen for a few years prior to that.

And we are really happy to be taking share.

We are growing faster than that at kind of 2% now year-to-date, and rolling over the kind of numbers that we are rolling over.

Clearly we are pretty pleased with the way our pizza is resonating and the mix of promotions and value we are giving to consumers.

Got it.

Then just from the cost side of things, I know, Mike, you mentioned the basket in the third quarter being up north of 8% with the cheese spike.

I think you mentioned that you'd assume -- I think your third quarter ended at $1.79 and that is the number you are assuming for the fourth quarter.

If that is right, I am just wondering what kind of color you can gather give in terms of what is contracted or what you feel comfortable with.

Not just in terms of what the basket might be for the fourth quarter, but rather your early read on 2012.

Obviously, visibility is somewhat limited, but what your thoughts are on 2012 from a commodity basket perspective.

Okay, well, as you said, the visibility is a little limited; that is still several months away.

The best information we have is that we should still expect commodity prices to go up, although hopefully at a much lower rate than what we observed this year.

When we get to the fourth-quarter call we will try and give you a little better visibility on what we really expect for our Company in particular.

Got it.

Have you been able to shift the couponing that you talked about last quarter to try and address the higher prices?

I know that was an initiative for you guys last quarter in terms of changing the way you do coupon, to address that.

Yes, it continues to be something we are looking at.

It is really a store-by-store thing.

Because you have seen the national promotion has stayed fairly consistent; certainly did through the third quarter with the Two Medium Two Tops for $5.99.

But those are always -- the national promotion is always overall a small percentage of the orders.

The majority of the orders are with coupons or menu prices that are set locally.

So we continue to give guidance out to the system on where the opportunities might be with those coupons to find a little bit of margin here or there.

But we have got to be careful on that.

We are doing that and we think we are making some smart decisions out there; but there are still headwinds for consumers and we are going to be very careful about that until we see the ability to do anything even moderately aggressive on pricing with the consumer.

Got it.

Thank you.

Alvin Concepcion, Citi.

Thank you.

Just a question on the domestic same-store sales momentum in the quarter.

It was pretty strong.

Did you see any changes in the momentum as the quarter progressed?

Are you seeing anything in the environment in October to date?

Any changes there?

No, I mean -- you know, we don't get into the timing within the quarter.

But I think really as we talked about the overall environment in the third quarter, I mean clearly the consumer has got even more nervous around the time when there was all of the commotion going on in DC.

But overall consumer is still being very conservative about their spending, and I don't see anything on the horizon in the near term that leads me to believe that that is going to change materially.

I think we have got time left in the situation we are in before we are going to see anything more robust out of the consumer and their spending patterns.

So we are excited to be where we are.

We are still driving good comps.

We have dealt with the commodity pressure that we had in the third quarter.

We are taking some share.

So we think we are getting the mix right.

Okay, great.

Then it sounds like carryout is becoming a bigger contributor to margin.

Do you have any color on what carryout is as a percentage of sales this year versus last year domestically?

And also if you know what it is internationally.

It's probably slightly higher internationally, but just slightly so, than it is domestically.

I think what we have said in the past is it is in the range of a third or so of our business.

And that may have been up a little bit over the past.

But it's still in that range.

Okay, great.

Thanks a lot.

Joe Buckley, BoA Merrill Lynch.

Thank you.

Just a couple specific questions.

First on the carryout, is that roughly one-third -- Patrick, is that up a lot if you looked on a three-year basis or five-year basis?

Yes, if you -- I will take you back a decade.

If you go back a decade it's up a lot.

If you go back to the year 2000 it was probably half that.

So it was more in the 15% to 20% range.

So it has been working its way up over that time period.

There hasn't been any given year where it spiked up a lot.

But it has certainly become a big enough part of our business that is why you see us putting a little bit of focus on it, and it continues to pay some dividends for us.

So yes, over the longer haul, it is definitely up.

Okay, then Mike, a couple of questions probably for you.

In the Q, it looked like the domestic supply chain earnings were actually down a little bit in dollars, not percentages.

Not a big deal but it sort of surprised me.

Could you address that?

Sure.

As I said in the comments we charge on a per-pound basis.

We have a fairly fixed cost.

And we have got a difference in mix going through the supply chains right now, which is having some impacts.

So even though we may have some slight volume increases in the stores, you may not necessarily have the same volume in pounds going through the system.

We have also got higher fuel costs going through.

But as you say, it is a relatively small adjustment and it is mostly just a mix issue.

The other thing I would add, Joe, is we are being very, very, very cautious and respectful with what we are doing from a pricing perspective.

Commodities are up, and the last thing we are going to do is pass through anything that we absolutely don't have to do.

Because we got to make sure that our franchisees are healthy.

So dollar-wise it was down a little bit.

It was because the mix was a little bit wrong, and we weren't going to do anything to fix that through pricing.

Okay.

Mike, on the foreign exchange, you gave a fair amount of data on sales.

What kind of impact did it have on EPS in the third quarter, maybe year-to-date?

And just based on current rates, what are you thinking for the fourth quarter?

The impact on the third quarter was a little more than a penny.

The year-to-date number is about $0.04 or $0.05.

Fourth quarter, as you have seen, numbers have been bouncing up and down out of some of our currencies.

Right now I would say we don't expect it to be anything much different than third quarter, maybe just a little bit less.

So somewhere in that $0.01 range versus the prior year.

Okay.

Then last question, the $7.99 price for the artisan pizzas, is that an introductory price or will that be a permanent price?

And is this a permanent addition to the menu, do you think?

Yes, certainly our intention is it is going to be a permanent addition to the menu.

It's the introductory price because we are still introducing it -- and I am not going to tell our competitors anymore than that.

What I would tell you is that it is a nicely profitable business at $7.99.

Our franchisees are pleased about what it does for the bottom line, even at the $7.99 price.

So we are not going to say more about what we are going to do on pricing on that going forward.

I think you will understand.

Sure, absolutely.

Okay.

Thank you.

Brian Bittner, Oppenheimer & Co.

Congratulations on the excellent quarter.

So, kind of a broad question.

Even in this sluggish economic environment your domestic franchisee base is clearly strengthening -- strong top line, improving margins.

So the confidence there must be building nicely.

I am wondering.

Outside of the 30 stores you recently sold to franchisees, do you feel there is a sense -- do you have a sense or feel there is an incremental willingness for your franchisee base to grow their exposure to Domino's and even potentially restart unit growth in the US, even given the economic uncertainty?

Yes, the answer is we are certainly materially better than we were in 2008.

But the cheese spike in the third quarter, while you are seeing it offset in our corporate stores, it didn't get offset entirely in our franchise stores.

That is not in our P&L, but it is something we are very focused on.

So I think the answer is -- we are certainly far better off.

If you look at a two-year comp of 15%, we are certainly much better off than we were two years ago in terms of dollar profitability, and our franchisees feel good about that.

But when cheese spikes up against -- up above $2.00 a pound, that has some real short-term impact.

So I think confidence is good, but still a little bit qualified until we see it flow through more on the bottom line.

And that is probably appropriate.

And while financing is there for larger players, it still has not opened up again materially for a new franchisee or somebody who owns one store wanting to open a second store.

So it is part of why you hear me continuing to talk about franchisee profitability and initiatives underway on how we are going to work on that, because we need to for exactly the reason you are saying.

Until we have got really strong confidence there, you're not going to get robust store growth.

And we are still digging out from where we were.

Now all of that said, I sure as heck feel a lot better about where our store-level profitability is than if I was a competitor that hadn't been putting up same-store sales growth the last couple of years.

I think you are continuing to see some weakness out there with some regional chains that have been hit pretty hard.

I think you have seen some bankruptcies from some individual franchisees of some larger chains.

I think you are seeing our taking share is playing out I think the way you would expect it to, which is you are seeing a little bit of pressure out there on some of the competition.

So I guess what I would say is your overall view on it is right, which is -- as confidence grows that is what will ultimately, from cash flow, drive store-level growth.

But I would say we are not all the way to where we need to be yet.

We are getting there.

It is improving over the medium term.

But there was a little bit of a setback with the cheese spike that we had in the third quarter, and we are very focused on that.

Okay, thanks for that thorough answer.

The second question is, obviously the franchise and company-owned stores' comps were both very strong.

But the company-owned stores were even stronger and even showed a larger acceleration in the third quarter.

I am wondering if there is anything in particular that you could point out from that.

Is that maybe from testing the artisan pizzas earlier in your company-owned stores, or is there anything else at work as far as the delta?

Yes, I would say right now it is really more to do with regional mix and simply some regions of the country doing a little bit better than others.

There are some specific markets within our corporate stores that -- I am not going to get into which they are -- but have done particularly better than some others on average.

So at this point I am pleased with the direction of our corporate stores.

I am pleased with their improvement in margin and I like the top line is healthy.

But I am not ready to declare a significant trend on that at this point.

We will see how that plays out as we go forward.

Okay, thanks.

And then just one last quick one.

You wasted absolutely no time using the $200 million share repurchase and obviously repurchased shares pretty aggressively in the quarter.

Is that more just price-sensitive or is that a change of cash use strategy?

Are we going to see more of this going forward?

Yes, it's -- we want to be the most shareholder-friendly company around.

And the answer is we run the numbers the same way any investor would.

We do generate an awful lot of free cash flow, now easing north of $2 million a week on average of free cash flow.

And we look at it and make decisions based on what is going to generate the best return for our shareholders.

And as we have proven in the past, we have paid ongoing dividends; we have paid one-time dividends; we have bought in debt when it was trading at a discount; and we were buying in shares significantly in the third quarter.

And that is an exercise that we are going to continue to go through.

We are going to look at that free cash flow as a real opportunity to return value to shareholders however it is best going to play out.

Our debt is still trading at a bit of a premium, and we certainly -- as you could see from our actions -- felt a whole lot better about buying in shares in the third quarter than any of the other alternatives.

So that will move over time as market circumstances change.

Understood.

You use your cash very opportunistically indeed.

Thank you very much.

Mark Smith, Feltl & Company.

Hey, guys.

Patrick, can you give us an idea of big-picture long-term international growth opportunities?

How many markets can you still get into?

And in those that you are currently in how much runway is still left?

Yes, the second answer is really easy.

There is more runway there than I am going to have to worry about in my career or maybe even my lifetime.

There is just an awful lot of growth.

You're looking now at an international business that is roughly the same size as our domestic business, but only 5% of the population is in the US.

So, there is huge runway for growth on the international side.

There are only a few markets in international that are anywhere close to starting to reach maturity.

And when you look at the kind of results that we are getting in places like India, clearly there is enormous runway for the business.

I think in terms of new markets, you are going to continue to see us go into some.

We are in 70-plus markets today, and there may be 10 or 20 more that we will go into over time.

But for the most part, most of the markets -- and you know there are still a couple left -- but most of the markets that are going to have real scale are markets we are already competing in.

Now, some of them may not be as developed as we'd like them to be, and we think we need to go much faster in some places.

But overall we are at least present in most of the markets that will constitute the majority of our growth certainly over the next five or 10 years.

Secondly, just with the 30 restaurants that you sold and any conversations with franchisees, do you see more demand from franchisees for stronger-performing units?

Or are franchisees looking for fixer-uppers?

You know, I think there is some of both.

The units we sold in Atlanta were not great-performing units.

So that was a little bit more of a -- to use your language -- a little bit more of fixer-uppers from a profitability and sales and upside potential.

But there are transactions that have happened amongst franchisees of buying and selling very strong stores.

So I think it is a combination of both.

Frankly, it is also a question of who is doing the acquiring and the extent to which they have got the people that they would need to go in and turn around stores, as opposed to if they are not quite as deep and might not have excess people resources, then they might be more focused on those that are already performing well and have good managers in place, etc.

So I think it is really a combination of both.

Maybe a little bit more around the fixer-uppers, particularly as we have come out of '08 and '09 and there were simply some fixer-uppers that needed to be purchased and moved.

But I think there is demand for both.

Last real quick question.

Do you guys what the prepayment fee or penalty is today on the debt?

From $20 million to $25 million.

$20 million to $25 million?

Great.

Thank you.

All right, well listen, I really want to thank everyone for participating in the call today.

Once again we were really pleased to report another very strong and consistent quarter of sales and EPS growth, and look forward to our full-year 2011 reports on February 28.

Until then, enjoy the football season, and eat more Domino's.

Thanks, everybody.

This concludes today's conference.

You may now disconnect.