達美樂 (DPZ) 2012 Q3 法說會逐字稿

Good morning.

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

At this time I would like to welcome everyone to the Q3 earnings 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.

I will now turn the call over to Ms. Lynn Liddle.

Thank you, Christie, and good morning, everybody.

Thanks for joining us on our third quarter very pleasant announcement.

And with us today, we have Mike Lawton, our Chief Financial Officer; and Patrick Doyle, our Chief Executive Officer, who have prepared comments but will follow with an open Q&A.

A couple housekeeping things -- we do ask the media to be in a listen-only mode, since this is primarily an investor call.

And second of all, I refer all of you to our 10-Q and our 8-K that were filed this morning and contained a Safe Harbor statement for forward-looking comments.

So with that, I will turn the call over to Mike.

Thanks, Lynn, and good morning, everyone.

In the third quarter, we grew our same-store sales both domestically and internationally and we achieved strong store growth in our international markets.

We also drove shareholder value with 22.9% adjusted EPS growth over the prior-year quarter.

Overall, we are really pleased with another quarter of strong results.

I'm going to start at the top of our results by looking at our global retail sales.

Global retail sales, which are the total retail sales at franchised and Company-owned stores worldwide, grew 8.4% excluding the impact of foreign currency.

As many of you know, currency exchange rates have had a negative impact for us this year due to the dollar strengthening against most currencies.

When we include the negative currency impact, our global retail sales still grew by 4.9%.

The drivers of the growth included domestic same-store sales, which were up 3.3% in the third quarter, lapping a positive 3% in the prior-year quarter.

This was comprised of franchisee same-store sales, which were up 3.6%, and Company-owned stores, which were up by 0.5%.

Our international division had another good quarter as same-store sales grew 5%, lapping a very strong 8.1% last year's quarter.

We closed 5 net stores domestically, consisting of 10 store openings and 15 closures.

For the trailing 12-month period, we have opened 5 net stores domestically and we still expect to be modestly positive as we close out this calendar year.

Our international division grew by a net 121 stores this quarter, made up of 130 store openings and 9 closures.

Turning to revenues, our total revenues were up $1.8 million or 0.5% from the prior year.

This increase was primarily the result of two factors -- first, higher international revenues due to both increased same-store sales and store count growth, which was partially offset by the negative impact of foreign currency; and, second, higher domestic royalty revenues due to same-store sales growth.

This increase was driven by a higher average ticket due to our product mix and marketing promotions as well as a slight increase in order counts.

Partially offsetting these increases was a decline in Company-owned store revenue from the sale of 30 corporate stores in the 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 onto our operating margin, as a percentage of revenues, our consolidated operating margin increased 2% from 27.5% to 29.5%.

This increase is primarily due to three factors -- first, our Company-owned store operating margins increased 3.2% as a percentage of revenues from the prior-year quarter, in part due to the positive impact of a higher average ticket and lower commodity prices, primarily cheese.

Second, a change in our mix of revenues positively impacted our operating margin as we now have fewer Company-owned stores and more royalty revenues.

And, third, our supply chain margin percentage went from 9.5% to 10.4%, an increase of 0.9%.

This was due to positive impact of product mix, efficiencies in our facilities and lower commodity costs.

The average cheese block price in the third quarter was $1.71 per pound versus $2.08 last year, which led to a 2.6% decrease in our overall market basket during the quarter.

As a reminder, food commodities are generally priced on a constant dollar markup to our franchisees.

Therefore, lower cheese prices do not impact our supply chain dollar profit.

They do, however, positively impact our supply chain margin as a percentage of revenues.

Although cheese prices have moved up recently, we now expect that our overall market basket in 2012 will be flat to up slightly over 2011 levels.

We expect that commodities will be up more in 2013 than they have been in 2012.

While it is still too early for us to provide a range, we believe the increase will be manageable in the overall context of our business.

We plan to provide an estimate of our 2013 commodity price changes when we hold our investor day, which is scheduled for January 18 in Miami, Florida.

So we expect to see good attendance from those of you coming from cold northern climates.

Turning to G&A expenses, G&A increased by $2.3 million or 4.8% quarter over quarter.

About $500,000 of that increase resulted from a 2011 gain on sales of some stores that we detailed an item affecting comparability in our 8-K.

The rest of the increase was primarily due to investments in technology, international and other strategic initiatives.

We said earlier that we expected our full-year G&A to be up $5 million to $7 million over reported 2011 levels.

We continue to run below our expectations as finding the right people to fill open positions in IT and international has taken longer than planned, but we are committed to making the strategic investments.

We now believe that we will be at or slightly below the low end of the G&A range we previously gave.

Regarding income taxes, our reported effective tax rate was 36.6% for the quarter due to a tax item affecting comparability explained in our earnings release.

Excluding that item, our tax rate was 38.4%.

For the year, we expect to be at the low end of the range of 38% to 39% that we had previously communicated.

Our net income, as reported, was up $3.9 million or 17.6%.

This increase was primarily the result of our higher domestic and international same-store sales, international store growth and higher Company-owned store margins.

These increases were partially offset by the negative impact of foreign exchange rates on our international royalty revenue.

Our third quarter diluted EPS as reported on a GAAP basis was $0.44 versus $0.36 in the prior-year quarter.

On an as-adjusted basis, diluted EPS was $0.43 for the quarter versus prior-year adjusted EPS of $0.35.

The $0.43 is an $0.08 or 22.9% increase from the $0.35 as adjusted in the third quarter of last year.

Here's how the $0.08 difference breaks down.

Our improved operating results benefited us by $0.08.

Our lower diluted share count, primarily due to our share repurchases, benefited us by $0.025.

Foreign currency exchange rates negatively impacted us by about $0.015 and a higher effective tax rate negatively impacted us by about $0.01.

Now turning to our liquidity, during the first three quarters of 2012, we generated $87 million of free cash flow, which we have used to pay a portion of our $3-per-share special dividend, make scheduled principal payments on our debt and repurchase and retire shares.

In the third quarter, we repurchased and retired approximately 190,000 shares of our common stock for $5.9 million, or an average price of $30.85 per share.

We ended the quarter with $34.6 million of unrestricted cash and we will continue to deploy our cash to maximize shareholder value.

Overall, we are pleased with the quarter and our consistent positive performance so far this year.

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

Thanks for the update, Mike.

Some of you might be thinking you have heard this all before -- adjusted EPS up 23% over last year, same-store sales up over 3% domestically.

In fact, in the last 15 quarters, 12 were positive and one was flat.

Internationally, sales were up 5% on a same-store sales basis, which is an astounding 75 consecutive quarters of positive same-store sales.

Well, you have heard all this before.

It's because the Domino's model is a model of consistency.

We think this steadiness is the hallmark of a business that's reliable and growing with strong free cash flow and a franchise structure that tends to be very dependable.

Our international business has continued its long string of success with nearly 19 years of solid growth from this division.

I'm confident that's a record in the restaurant industry.

Our international franchisees are clearly offering the product, service and value that resonate with customers around the world.

We've also had other exciting news out of our international franchisees lately.

Domino's Pizza UK recently announced that it acquired the rights to Switzerland, Luxembourg and the option to acquire Austria.

This is just a year after they bought the rights to franchise in Germany.

This kind of expansion of an established and committed franchise group is great news for us and our systems.

The Economic Times awarded our franchisee in India, Jubilant FoodWorks, with the title of Emerging Company of the Year.

The chain has been growing sales at a nearly 50% compound annual growth rate over the past six years.

They are a clear leader in the restaurant industry in India, and we are proud of their many accomplishments.

This includes the incredible pace of their store growth as they currently lead our system in new units.

And we had a robust net store growth all around the world during the quarter.

This resulted in an important milestone at the end of September when we celebrated the opening of our 10,000th store.

We believe we are part of a very elite group as there are now only eight restaurant chains that can claim to have 10,000 units worldwide.

We are extremely proud of this historic event, and I was personally proud to celebrate this landmark moment in Istanbul, Turkey, which is another one of our fast-growing markets.

While we've seen our share of challenges over the past 50 years, reaching the 10,000-store milestone has always been an important goal for our franchisees and management, which took focus, diligence and perseverance to achieve.

But of course, we are not finished growing.

This is just a platform to launch our next phase of worldwide expansion.

While the US is our largest market in the world, our international division has been the accelerant for growth in the past decade.

Pioneering markets such as Australia, Mexico, India, the United Kingdom, and new markets such as Nigeria and Macedonia, which both recently opened, are all part of the vibrant, substantial Domino's brand that we have become worldwide.

We've had robust store growth internationally, but new units have been harder to come by in our more mature domestic system.

We had net negative store counts this quarter but we are encouraged by the fact that we've had fewer closures year-to-date than we did last year.

And as Mike mentioned, we expect to be positive for the year.

We're also excited about our new store design package, which was announced in August.

It's important news for us because it's another element of the continual evolution of our global brand.

One of the great features of the new store design is that it is very a la carte.

To do everything we showcased in our press release, you would need a few hundred more square feet than an average US store currently has, but not everyone will choose all of the options we've made available.

A store with 900 square feet in Manhattan will probably not choose a large waiting area with a television.

But if you've got a 1600-square-foot space in Istanbul, you might choose to have a grab-and-go cooler, a large waiting area and a nice pizza theater for customers to experience the pizza making process.

The cost of a remodel with the updated design is not materially different from store remodels of the past.

It is possible, however, to spend more than our usual range if every option we put out there is chosen in new stores.

As the rollout of these stores continues, we expect it will bring the costs of some of the more expensive elements down.

We think this new store design is inspiring to our franchisees and is friendlier to customers who pick up their orders.

We don't believe that the higher-cost options will impact franchisees' growth plans.

Store-level economics continue to improve in the US and we are hopeful that these new units will generate an even more favorable economic model.

While we are talking about stores, I want to take a moment to highlight the 387 corporate stores we have here in the US.

We announced a change in leadership for the store portfolio recently.

Steve Akinboro will now leave that division.

Steve has been with us for three years -- a little over three years, in fact -- serving on the franchise side of our business, and is the Vice President for the Western Region.

He's had great success helping to drive positive sales growth and new store growth in the region as well as increased scores on a number of internal operational measures.

I'm happy to welcome Steve to leadership team.

We're also pleased that the former head of this division, Asi Sheikh, intends to stay with our brand as a franchise owner.

I believe he's going to have great success.

So, while store growth and new store designs are important in setting us apart from the competition, another key element of our success continues to be technology.

Our international master franchisees lead in many ways.

In Australia, 40% of digital orders are now through mobile devices.

In the UK, digital orders are now 58% of delivery sales with total digital sales up by 39% in the third quarter versus the prior year.

Here in the US, our digital platforms continue to perform well and set us apart from the competition, particularly the smaller players.

About 40% of our delivery orders come through from digital, and that continues to grow.

Roughly a third of our total orders come through digital channels now.

Consumers love our digital ordering, so improving and expanding this ordering platform will continue to be an important focus of our strategy.

Consumers also love our new product news, and early in the fourth quarter we launched our new Handmade Pan Pizza featuring fresh dough.

And with one in every five pizzas sold in the US today being a pan pizza, we felt there was a significant opportunity in this product segment.

It may be tempting to equate this to the relaunch of our Hand-Tossed Pizza in early 2010, but it's not quite the same.

Hand-Tossed is our core product and makes up the majority of our product mix.

Pan, on the other hand, is currently a much smaller part of our sales, but it is a much larger part of the product mix for many of our pizza competitors, and now we can compete in this segment, too.

We've spent three years making sure that we did it right.

The big differentiator, in my opinion, is that our Pan Pizza, just like our Hand-Tossed Pizza, is made from fresh dough.

We will see what American consumers prefer and we will be able to update you further on this exciting new product during our fourth-quarter earnings call.

We believe both innovation and consistent performance continue to set us apart.

Whether it's store design, technology or new products, we think our continuous improvement and focus on the customer experience is what keeps this 52-year-old brand fresh and dynamic.

Our substantial global footprint with over 10,000 stores makes us a significant brand that has impressive global reach and name awareness worldwide.

I'm proud of the results we delivered in the third quarter and look forward to updating you in February.

And with that, I would like to open the line for questions.

(Operator instructions) Michael Kelter, Goldman Sachs.

(technical difficulty) -- update on the Pan Pizza lunch.

I wanted to dig in a little bit more there, and I know you don't want to necessarily talk about numbers.

But maybe you could just give us some sort of description of your early experience with the launch relative to your expectations and maybe anything that surprised either way, positive or negative.

It happened in the fourth quarter, so we're not going to talk about results from that.

All I will tell you is we think it's a terrific product.

We spent a lot of time making sure we got it right -- about three years, in fact.

And specifics around its performance we will discuss in February, once we're talking about the fourth quarter.

But it did launch after the end of the third quarter, so nothing that I can talk about at this point.

And, on a completely separate note, the international unit growth appears to be on pace for at or potentially above your 350 to 450 guidance for the year.

So I guess my question is, when might you evaluate whether you need to take that guidance higher?

And looking forward, will the global macro slowdown impact the pace of openings in 2013, or do you feel like you might build on the 2012 pace?

Yes, so generally we look at where we are once a year and the longer-term guidance we are giving.

You are right; on a trailing basis right now, we are ahead of that 350 to 450 guidance.

That's obviously a good thing.

If we were going to make a change, you would likely hear about it in January at our investor day.

And I'll tell you, as you saw and as I have been saying a few quarters in a row, we keep looking at the international side of this, waiting for signs of weakness to appear out there, because clearly there has been slowdown, particularly in Europe.

You probably saw; the UK already released.

They were up 3.7 same-store sales in the third quarter, and it's really the same story.

Things have held together nicely.

We are very happy with 5% same-store sales growth.

Greece has continued to be weak.

Spain has not been great -- not horrible, but not great.

But the rest of it has really held together nicely.

I guess what's probably more important is, from a store growth standpoint, is we track very carefully the payback period on stores around the world, including the US.

And the best indicator of store growth over the medium term is the ROI on those stores and it continues to be very strong in international and in fact, if anything, maybe getting stronger.

And we think that's what generates store growth.

So as long as that trend continues, we feel pretty optimistic about store growth.

And as you pointed out, on a trailing 12-month basis right now, we are over the high end of our long-term guidance.

Thank you very much.

John Glass, Morgan Stanley.

I wanted to ask about the composition of the comp store sales this quarter, maybe sort of thinking about it going forward.

We are still talking about maybe more favorable mix, driving it over traffic.

And so, first of all, is that a function of maybe just the digital ordering, up-selling customers better?

If you could comment on what role that is playing in this favorable mix equation.

And also, how does Pan Pizza fold into it from a mix perspective?

It's a higher -- for a medium pizza, it's a more expensive pizza.

It's obviously got more weight to it.

Do you view this as more of a mix driver than it is a traffic driver?

So a couple parts there -- first, we are happy that we had positive orders in the third quarter.

It's something we've been talking about, but we are still getting some ticket growth.

And we really feel like the order count growth is ultimately going to be the driver of the health of the business over the long-term.

In terms of Pan Pizza, yes, it's $7.99, so it's more expensive than the 2 for $5.99.

But it is one pizza for $7.99 instead of two pizzas for $5.99.

So there's some kind of play in that.

What I would tell you is, our overall experience continues to be the same.

Order counts get driven by center-of-the-plate items in the restaurant industry.

And for us, that's pizza.

So selling a Pan Pizza or selling two mediums for $5.99 is going to tend to do better, in general, on order counts that when you are talking more about side items.

And so I made that comment before, and I think that still holds true.

And clearly, there's got to be some balance in that, because selling sides are good for the profitability at the store level.

And as profits are better at the store level then, ultimately, that's going to generate better returns for our franchisees, which will hopefully generate some store growth.

So there's always going to be a balance on that, but in general, I would tell you that when we are talking about pizza and promoting pizza, you are probably going to see on average a little bit more on the order count side.

Great.

And just as a follow-up, have you ever had or have you ever launched a pan pizza before?

It's not in my recollection, but it seems that maybe sometime in the distant past, you've done this.

And is there any relevance of that experience to this time around?

Yes, we did, long time ago -- actually predated me; I've been here a little over 15 years now.

And the answer was, I don't think we did it right.

I think we didn't take the time to make sure that it was the best possible pizza, and it's really why we haven't been a player in this category.

So I think the answer is -- we feel very good about this pizza.

It's a terrific pizza.

Hopefully, all of you have had it now.

Hopefully, you've all had it more than once.

And we feel great about the quality and the taste of the pizza.

And I think, when we did it in the past, I don't think we got the product offering right.

Thank you.

Jeffrey Bernstein, Barclays.

I just had a couple of questions, follow-ups on the US comp.

Just wondering, first of all, if you can just talk perhaps about the industry.

It seems like you and your largest peers continue to surprise to the upside.

I'm just wondering if you can talk about whether you are seeing now an acceleration in industry growth.

I know previously, you had said low-single-digit growth at best, but it would seem like, unless the independents are in more severe decline, that the category might be growing faster.

And then my other question is just a follow-up on the Pan Pizza.

I know it's early, but it sounds like with three years of test, you probably have some interesting learnings.

I'm just wondering whether you can share perhaps what changes took place over time.

I think you mentioned 1 in 5 across the industry are sold as pan pizza.

I'm just wondering what your expectation is.

I know you don't want people to be as build-up as when you did the entire new pizza platform a few years ago, but your thoughts on what you could achieve.

Yes.

Look, we think it's a great pizza.

And what we've learned over the three years is it takes some time to get this right.

It's a thicker pizza, and you've got it in the pan.

It requires a little bit more heat to cook it.

So balancing that out with the rest of your menu is a little bit of a trick, and that took us some time to get that right.

But other than that, I'm not going to get into the kind of speculation around where it's going and fourth-quarter commentary.

But it's a great pizza.

And our view is, at the end of the day, the quality of what you are selling is what's going to drive sales.

And our learning has clearly been, over the last three years, that if we come out with products that consumers are excited about and we take the time to make sure we are doing it right, then we are going to get good results out of that.

And Jeff, I've now forgotten what your first question was.

Oh, industry, right.

The broader category.

Yes, so category -- no, I don't think the category has necessarily grown any faster than it was before.

I think the answer is very similar to what I've said in the last couple of quarters, which is I think you are seeing, finally, some share gains by the larger players.

So I think there is a little bit of growth in the category, but I think what you are seeing is the larger players are taking share from the regionals and smaller players.

You have seen some of that strain out there, I think, on some of those smaller players.

There was a small chain out in Boston that filed recently.

But overall, I think it's about share gains from the nationals versus the regionals and smaller players.

And just lastly, can you give us an update -- I know this past call, you paid that $3 special one-time dividend.

I'm just wondering your thought process.

It seems like share repurchase is the primary focus, but a return to maybe a more regular dividend relative to kind of the intermittent kind of one-timer.

Any thought around that or would you prefer to steer clear of kind of regular?

Well, no.

We consider everything, and the answer is we look at things hopefully the exact same way that our investors do.

We run the numbers.

We look at what we think is going to generate the best overall returns for our shareholders.

Clearly, again this past quarter the answer for us has been share repurchases.

And I guess the other thing is, like everybody else, we are going to be waiting to see what the tax rate is on dividends and capital gains in January.

And as that will play into our thinking as part of the way we look at the returns that are going to be generated for shareholders, keeping in mind that some shareholders are not going to be tax-paying entities, but we are going to run the numbers the same way we always have.

And as -- it's possible that those tax rate changes, if they happen, will then play into that as well.

Great, thank you.

Brian Bittner, Oppenheimer.

You've really become much more focused on driving your carry-out business over the last couple of quarters.

I'm just wondering if you've seen any change in the mix from your carry-out business thus far.

I think we've seen actually a little less growth on that this year.

And I mean, overall, while we had some slightly positive orders in the third quarter, we didn't get robust order growth yet in the third quarter.

But it has been a balance.

And while we did see more carry-out growth in the previous couple of years, I think we've seen less of that this year.

Okay.

With the stock buybacks, they definitely were a little bit light of where I was looking for.

It seems as though you still have a lot of cash on your balance sheet.

Is there any reason why you didn't buy back more stock this quarter, and you are keeping some -- a pretty healthy amount of cash on the balance sheet?

Well, we are pretty conservative about the amount of cash we keep on the balance sheet.

It's also a pretty short window in the third quarter.

But no; it's just something we are always looking at.

And that's -- I think we would up with a little bit more at the end of the third quarter than at the end of the second.

But I wouldn't read a lot into that.

Okay, alright, thanks, guys.

Joe Buckley Bank of America.

Two questions -- Patrick, could you elaborate a little bit on the market share gains by the large companies?

I know you've talked in the past about some of the technology advantages.

Is that the primary driver, do you think, that may have changed the game a little bit versus the regionals and the independents?

And then second question -- could you just talk about media spend third quarter versus fourth?

Did you keep some of your firepower in reserve so fourth-quarter media spend might be stronger, especially around the Pan Pizza launch?

Yes, I'll take the latter one first.

No, I don't think we necessarily were carrying that much more into the fourth quarter than the third.

I think, if I remember -- somebody can check -- we may have been up just slightly on our advertising fund reserves versus the prior year, but nothing really material on that, Joe.

And in terms of the dynamics of the share gains, it's a really interesting one.

The real change has been the digital side.

And so I think your theory on that is a good one.

As I look at it, there have always been three things that Domino's and our national competitors have brought to the table -- first, just the scale and what that means in terms of purchasing power.

The second is brand strength and our ability to advertise and build our brands.

And third is know-how around the business and systems that we've developed over decades that make our franchisees and store managers more successful at running the stores.

And personally, I would have expected you would have seen more share gains over time from those things than you saw.

And the answer is really, over the course of a couple of decades, you hadn't seen much in the way of share movement towards the national players in the pizza category.

And you are now seeing it, and it's 6 or 8 quarters in a row, I think, if you look at it.

And I don't know if that's a long-term trend yet.

I hope it is, but I think some of it may just have been the economic environment and the financial strength of the national players and their franchisees to weather the storm and maybe come through it a bit more aggressively.

And the other part of it is, as you say, technology and the better customer experience, the efficiencies that that gives us in our business and, frankly, the difficulty that regional and smaller players have in putting together an ordering platform, a digital ordering platform like we have.

So I don't know the full answer.

And obviously, I don't have as much insight into what competitors are doing and how their numbers look around that as I do from our own numbers.

But I think it's clearly playing into it, and I think that is at least part of the reason that you are seeing some movement towards the national chains.

Thank you.

Mitch Speiser, Buckingham Research.

First on the third quarter comp, I believe you advertised sandwiches early in the quarter, and then the 2 for $5.99 at the end of the quarter.

Can you give us a sense if they were both traffic drivers, or if sandwiches maybe were more a driver of checks?

I'm just trying to get a sense of where the increased order counts came from.

We don't really get into breaking down quarter more finally.

But the answer is, overall, it was a good quarter, and pretty much everything we were doing worked for us.

So I'm not going to get into the specifics around it, but it was a pretty strong quarter overall, kind of start to finish.

Fair enough.

And on the store margin, it was a big quarter of margin expansion.

Cheese costs, I'm sure, were a big driver of that.

I did notice that the labor leverage was a bit less than it has been in prior quarters.

Could you maybe discuss on a go-forward basis, are some of the productivity initiatives now complete?

The labor leverage that we've seen over prior quarters was north of 100 basis points.

Now it's running at about 20 basis points.

Is it fair to expect that those days of 100 basis points of leverage are behind us, or are there more productivity initiatives on the horizon?

We've certainly captured some of the opportunities that we were pursuing.

But if you look at the labor productivity that we have in our corporate stores, there's still a lot of things that we can do.

But I don't know that you will see those in the next quarter or two.

I think what you saw this quarter is probably reflective of what you see short-term.

Okay, great, thanks.

And moving along, I think, Mike, you gave us your food cost outlook for the year.

Can you tell us what that implies for the fourth quarter?

That gives you a fairly -- cheese prices have spiked up.

We are currently up over $2 a pound, so we would expect them to run higher than they did in the third quarter.

But as you can see, we are still expecting a very, very manageable number in Q4 because we expect to be up only slightly for the whole year.

And we were negative versus last year in Q3; we could be flat/very slightly up Q4.

Great, thanks.

My last question is on the new prototype store.

Could you give us a sense of how many stores have this new design?

And is it comping better than the overall average?

And because they are such nice looking stores, are they more, I guess, front and center in a trade area?

And is that maybe driving the takeout part of the sales mix?

Right now, we have still only got a few dozen of them out there.

So we are very happy with the initial reaction and response to it.

But I want to be careful about the statistical significance of what is still fewer than 50 stores.

By the end of the year, we're probably going to have a much more robust sample of those stores built, and we will get more comfortable with what it's doing in terms of better-than-average lift in the stores.

But the early read is certainly positive.

We are happy with it.

Consumers are happy with it.

But I want to be careful about projecting any early positives from that to a broader base until we've got a bigger sample out there, because you're always going to have just that much more excitement from the early people that are adopting something.

And so I just want to be a little bit cautious about that.

But overall, we are happy with it.

Great, thanks very much.

Alvin Concepcion, Citi.

A question on the Pan Pizza launch.

You mentioned one in five pizzas sold are pan.

Of that, in general, what portion of pan pizza customers do you believe are less brand loyal and maybe willing to switch, based on history?

Well, we don't have a real history with pan yet, so we are going to find out on that.

But we think we've got a great product.

We've got a great pizza.

The taste and quality is right.

We think that the fact that we are making it fresh is a differentiator versus both the frozen pizza that people are buying in grocery stores as well as some of our competitors.

And so we think it's a compelling proposition, but time will tell.

Okay, great.

And then on commodities you mentioned 2013 is going to be higher but manageable.

What are some of the levers you would consider pulling to manage through that?

Is pricing on the table or will traffic and mix be more the key there?

Right now, I'll tell you that we think it's going to be, as Mike said, manageable.

And so we will see as we get closer to it.

There isn't a lot of visibility out right now for us past the first half of the year.

And for us, so much of it is driven by cheese that it's a little difficult right now to peg that strongly for the full year.

Cheese is a bit above where we expected it to be right now, and our expectation is that we are probably going to see it back off somewhat, but we've got to see.

But overall, as we look at it, as Mike said, we think it's manageable.

And how we work through that -- yet to be determined as we get a little more visibility on it.

Alright, thank you.

Peter Saleh, Telsey Advisory Group.

Congratulations on the quarter.

I just wanted to ask about the domestic business and just the health of the franchisees.

It seems like they are in much, much better shape today than they were maybe 3 or 4 years ago.

And so I guess the question is, around unit growth, are you seeing franchisees coming to you and looking to expand on a unit growth basis?

Yes, they clearly are better off financially.

The overall store-level profits are up materially from where they were 3 or 4 years ago.

Some folks are still digging out a little bit from the downturn.

Good news is that availability of debt for larger players has gotten materially better I think over the course of the past year, and at very good pricing.

The bad news is that availability of debt for smaller players is still pretty weak.

So if you are a larger player with $20 million or $30 million or $40 million -- 20 or 30 or 40 stores, that wants to borrow $1 million or more, there's pretty good availability out there.

If you are a two-store person looking to add a third store, that availability is still pretty weak, and so that clearly still plays into it.

And, look, our franchisees are exposed to the same things that all of us are as consumers and as business people, and the environment out there is still perceived as being a little bit wobbly.

So there's still a little bit of conservatism.

But we've got a number of folks who are certainly getting much more aggressive about either building or doing some buying, and we think that ultimately will be a positive for us.

Just as a follow-up on that -- can you just remind us again what percentage of your system is composed of these larger franchisees versus some of the smaller ones?

We are still at -- on average, our franchisees are just over four stores per franchisee.

So I think we've got -- I know we have fewer than 100 franchisees who have 10 or more stores in our domestic system.

So you are still looking at a system that, on general, is still made up of smaller entrepreneurs, small business people, and fewer larger players.

Great, thank you very much.

Mark Smith, Feltl & Company.

(technical difficulty) -- comment on competitive pressure as we look at pricing, what you're seeing out there today, and as we start to look out to 2013, what opportunities you have to take pricing.

You know, the consumer really decides that more than the competitive situation.

And the answer is consumers are still relatively conservative.

And to the extent to which we look at the competitive environment, I think it has been pretty consistent over the course of the past year or 18 months.

And from our standpoint, we are still seeing a consumer that's being very careful with how they are spending money.

And we've got to continue to give them good value.

So I don't know that I see a whole lot of room on pricing out there.

Second question -- can you just talk a little bit about potential health care cost changes and the impact that could have on you but maybe more so on your franchisees and what you can do to help them?

Yes.

I think that the real answer on that is there are a whole lot of rules that are still being worked through in DC.

And how much or how little we are going to get affected by PPACA is really going to be a function of those rules.

So as they look at look-back periods and definitions of full-time or part-time and just a lot of things that still need to be worked through, that's really going to drive the answer on it.

So it's certainly something we are watching very carefully.

And I think, until those rules are kind of settled, it's still going to be -- I can't give you a real tight answer because that's still going to drive a fair amount of variability on what that answer is going to be.

Would you say that this is an overhang for potential domestic unit growth at this point with your franchisees, or are they not as concerned about it right now?

No; I guess what I would say is the overhang, if you will, is uncertainty around the market in total.

So it's not around that as much as it's around the overall economy, around what's going to happen with tax rates.

Just all of these things I think kind of weigh on all of us.

And there's just -- there's a reasonable amount of uncertainty out there right now.

And so, until we know what tax rates are going to be, until the election is over, until rules are resolved on healthcare reform, all of those things, there's some uncertainty out there.

And I think people, once there is more certainly one way or the other, people will get a little bit more aggressive again.

Perfect, thank you.

John Ivankoe, JPMorgan.

(inaudible) on for John.

Two questions, if I could.

The first is on digital sales.

Patrick, you discussed I think a 40% number on a one-third of order transactions in the US.

I wanted to clarify what the difference was there.

And then you touched on it as a driver of share of sales gains.

But as the digital sales continue to potentially increase as a percent of orders, I wanted to get a sense for how you think about the labor or other productivity savings that you achieved at the store level and how to think about that going forward.

Yes, so the answer is 40% of our delivery sales are digital and about a third of our total sales are digital.

So clearly, as people are at home or at their office ordering, they are more likely to do it than if they are going to pick it up.

And a little bit under 10% of our customers actually just walk into a store and order there on the spot and then wait for their pizza.

So it's a small part of our business, but that plays into that mix differential as well.

So in terms of labor, the answer is some of the improvements in labor efficiency that you've seen have clearly come from a higher mix of digital orders.

And we are well into the range on those orders that incremental business going to digital will drive some labor efficiencies.

I will tell you when we were first getting this going in digital, we didn't see it as much for the first 10% or 15% of sales as we thought we were going to.

And then you could start to see it hitting.

And in hindsight, I guess it makes sense.

Until you carved off enough of those orders, you look at it and say, are you really going to cut out hours from your schedule?

And the answer is, we didn't see as much of it early, I think, as maybe we thought we were going to.

But at this level, it clearly drives some efficiencies for us.

And I expect that that will continue as it grows.

Okay, and then switching gears a bit, as you think about the free cash flow for 2013, how is the CapEx shaping up?

Is it something to think about within that long-term range of $25 million to $35 million?

We are in the process of putting budgets together, but at this point I would continue to work with those numbers in your model.

And we will give a further update on that in our investor day in January.

Got it, thanks a lot.

(Operator instructions) Steve Anderson, Miller Tabak.

Just I wanted to touch base with you.

You gave some results for same-restaurant sales in the UK.

Have you been able to provide any results for India, or when can we expect that to be released?

I don't believe that they have released yet.

And I think they are -- we are checking, but I think they are a couple of weeks --

They are a calendar quarter.

Yes, they are on a calendar quarter, so I think they are a couple of weeks out.

But it's Jubilant FoodWorks.

And unless we can look it up faster than I can stall to give you the answer --

November 7.

November 7, I stalled long enough.

Okay, great.

So I guess at that time, we can get some color on new unit openings as well?

Well, you will get it from them.

Great, alright, thank you.

There are no further questions on the phone lines at this time.

Terrific!

Well, I appreciate everybody getting on the call today.

I look forward to reporting our fourth quarter results to you in February of next year.

Thanks, everybody.

Thank you for participating in today's call.

You may now disconnect.