達美樂 (DPZ) 2012 Q4 法說會逐字稿

Good morning.

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

At this time, I would like to welcome everyone to the Q4 and year-end financial results 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. Liddle.

You may begin your conference.

Thanks.

Good morning, everyone.

We are excited to be here with you today.

I am just taking care of the little housekeeping items such as making sure that you have all looked at our Safe Harbor statement in the event that we do make any forward-looking statements.

And also kindly ask the media to be in a listen-only mode this morning.

With me today we have our CEO, Patrick Doyle, and our CFO, Mike Lawton, who will make some prepared comments for you, and then we'll open it up to Q&A.

So with that, I'm going to turn over to Mike.

Thank you, Lynn, and good morning, everyone.

We continue to build on the positive results we had in the first three quarters of 2012 and delivered another solid quarter for our shareholders.

The international division led the way, with both strong same-store sales and store count growth and our domestic stores also posted positive same-store sales and store comp growth.

Our bottom line grew in the fourth quarter with 21.6% net income growth over the prior year, which provided additional free cash flow for share repurchases.

Here is how the fourth quarter came together.

Global retail sales, which are the total retail sales at franchised and Company-owned stores worldwide grew 9.4% when excluding the impact of foreign currency.

When we include the impact of foreign currency in the quarter, our global retail sales grew by 9.7%.

The drivers of this growth included domestic same-store sales, which were up 4.7% in the quarter lapping a positive 6.8% in the prior year quarter.

This was comprised of franchise same-store sales, which were up 4.9%, and Company-owned stores, which were up 2.5%.

Our pan pizza launch in the fourth quarter positively impacted our same-store sales and also drove an increase in order counts.

Our international division had another good quarter as same-store sales grew 5.2% lapping a 4.7% increase in the fourth quarter of 2011.

Now we opened 32 net stores domestically in the quarter consisting of 51 store openings and 19 closures.

For the full year, we opened 21 net domestic stores and we remain focused on growing our store count in the United States.

Our international division grew by 183 stores this quarter made up of 223 openings and 40 closures.

For the full year, we had record international growth of 492 net new stores.

Turning to revenues, our total revenues for the quarter were up $37.9 million or 7.6% from the prior year.

This increase was primarily a result of three factors.

First, higher supply chain revenues resulting from both increased volumes from higher order counts and a change in the mix of products sold for order.

Second, higher international revenues due to increased same-store sales and store count growth.

And third, higher domestic royalty revenues due to same-store sales growth and the impact of increased store count.

Moving on to our operating margin, as a percentage of revenues, our consolidated operating margin for the quarter increased 0.9% from 28.9% to 29.8%.

This change was primarily driven by three factors.

First, Company-owned store operating margins increased as a percentage of revenues from the prior year quarter due to reduced utility and occupancy cost as well as adjustments in our self-insurance reserves.

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

Third, our supply chain margin percentage increased slightly from 10% to 10.3% due to the positive impact of product mix and efficiencies at our facilities.

On a separate note, commodities were up slightly during the fourth quarter but ended fiscal 2012 fairly flat and the market basket in the stores was down 0.3% for the year.

As I stated at our Investor Day in January, we currently expect to see a commodity increase of 3% to 4% in 2013, which we believe will be manageable in the overall context of our business.

Turning to G&A expenses, G&A increased by $3.9 million or 5.7% quarter over quarter.

The increase was due to investments we are making to feed our international growth engine and to continue our technological advantage.

There was also additional expense from variable performance-based compensation.

Our G&A for the full-year 2012 was $219 million.

As we look to 2013, we expect to have increases for international support personnel, e-commerce and technological support, and other strategic initiatives.

Additionally, we now expect 2013 G&A to be higher than previously communicated because of an increase in non-cash compensation expense, which I will elaborate on shortly.

The result is an expected increase of $9 million to $13 million over our 2012 reported levels.

Keep in mind that G&A expense can vary up or down by among other things, our performance versus plan as that affects variable performance-based compensation expense.

I would also note that we charge franchisees for providing e-commerce and technological support and we expect to have increased revenues of $1.5 million to $2 million in 2013 related to these services.

Regarding income taxes, our reported effective tax rate was 37.7% for the quarter.

We currently expect that 37.5% to 38.5% will be our normalized effective tax rate for the foreseeable future.

Our fourth-quarter net income as reported was up $6.7 million or 21.6%.

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

Our fourth-quarter diluted EPS was $0.64 versus $0.52 in the prior year quarter; $0.64 is a $0.12 or 23.1% increase from the $0.52 in the fourth quarter of last year.

Here is how that $0.12 difference breaks down.

Our improved operating results benefited us by $0.13.

Our lower diluted share count primarily due to our share repurchases benefited us by $0.01 and a higher effective tax rate negatively impacted us by $0.02 due to a slightly lower effective tax rate in the prior year quarter, when we had a lapsation of some federal and state statutes of limitations.

Now turning to our use of cash, in the fourth quarter, we utilized some of our available cash to repurchase and retire approximately 1.1 million shares of our stock for $45.5 million or an average price of $40.05 per share.

For the full year 2012, we repurchased approximately 2.5 million shares or $88 million or an average price of $35.68 per share and we ended the year with $54.8 million of unrestricted cash.

Looking forward, we believe we have cash beyond what we need to reinvest in our business.

When considering this excess free cash flow, we've got three options.

We can pay down debt, we can buy back stock, or we can pay dividends.

Given that we are comfortable with our level of debt, we currently do not plan to pay down debt any faster than the required amortization.

Based on a revaluation of these options and are historical consistent free cash flow, the Board of Directors has initiated a quarterly dividend of $0.20 a share.

We also plan to continue to use our excess free cash flow to repurchase stock.

In recognition of the lost economic value to option holders as a result of the initiation of regular dividends and due to the Board's desire to both reward and retain our proven management team, the compensation committee approved an additional grant of equity instruments.

This additional grant does not take the place of our usual annual grant and is the reason we updated our G&A outlook.

Further details will be disclosed in both our 10-K and our proxy statement.

In closing, our strong fourth quarter continued our consistent performance throughout 2012.

Our focus remains on improving our operating performance, growing our global store base, and utilizing our free cash flow to drive shareholder value.

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

Thanks, Mike, and good morning, everyone.

Nothing makes me happier than reporting another great quarter and another terrific year.

Really everything went our way in the fourth quarter and it capped off a very successful 2012.

We maintained our store growth and sales momentum.

We grew market share in the US and in international markets.

We increased EPS by 20% and we reached 10,000 stores worldwide, putting us in a league with only a select few restaurant peers.

We also hit over $2 billion in digital sales globally, making us a top technology brand around the world.

And as Mike just mentioned, we are proud to have also just announced the initiation of a regular quarterly dividend.

Domestically in the fourth quarter we launched our handmade pan pizza, a very high-quality fresh dough product that we believed would be a hit with consumers and we were right.

It helped drive higher sales as well as increased traffic into our stores, something that is a key metric for us.

Early indications are that online customers were some of our best pan pizza customers, engaging strongly with this new product.

Consumer feedback on the product has been very positive and our theory is that consumers prefer a fresh dough product over frozen alternatives.

We now have a product competing nicely in this category and we are gaining a meaningful foothold with lots of opportunity for future growth.

Meanwhile the net domestic unit growth we record in the fourth quarter means that we ended the year up 21 net new stores.

Modest growth but we consider it a hopeful sign for continued US store development in the years to come.

Promotions that increased store level profits and our successful pan pizza launch coupled with tame commodities all led to a strong year for franchisees' store profits, which ultimately leads to an energized franchise base.

In fact, our franchisees recently voted to increase our national advertising spend going forward, upping it to 6% of topline sales from 5.5%.

Through extensive market research and media modeling, we were able to make an informed and thoughtful recommendation for increased national advertising to our domestic franchise owner.

This is expected to be a shift from local advertising into national advertising and we think this is a positive vote of confidence from our franchisees.

Our franchisees in the US have a lot to feel good about including our strong technology focus, which we believe is giving us the edge over smaller pizza players and garnering market share increases.

Our best information so far indicates that our growth in 2012 was higher than the overall category and that our ability to continue to gain market share in the US grows with our continued innovation around technology and the consumer experience.

From store operations to direct marketing technology was an important focus for us in 2012 and will remain an area of investment and leadership for us in 2013.

Another area of leadership for our brand is in our international division, where we once again produced excellent results.

International store growth was robust all year and the fourth quarter was no exception as we ended the year up a net 492 stores, our best year ever for international store growth.

That dynamic store count growth was matched by another remarkable year for same-store sales up 5.2% in the quarter and for the year.

For those keeping score, that is 76 consecutive quarters of positive same-store sales, which is 19 years of positive growth from this division.

And the international franchisees did this in a year when the macroeconomic picture wasn't all rosy.

But again, we drove good, steady results from a wide mix of countries.

In large countries, small ones, new markets, or established markets, our geographic diversity and long runway for growth has helped keep our international business vigorous.

Our international business continues to be a growth engine for Domino's Pizza.

Notable markets with good sales growth in the quarter included South Korea, Turkey, and Brazil and even an economically troubled market like Spain managed to have positive sales results in the quarter.

Continued success in the store growth in our international business has resulted in a change in our long-term outlook as communicated in January.

We now believe that we will drive 4% to 6% global unit growth, which is an increase over our previous range of 350 to 450 net new units.

This also led to an increase in our global retail sales range which we now believe will fall in the plus 6% to plus 10% range.

This change reflects the confidence we have in our international business and the tremendous growth potential that this division can drive going forward.

We believe investors have good reason to be happy with their investment in Domino's in 2012.

We increased adjusted EPS 23% in the fourth quarter and nearly 20% for the full year.

We used $88 million of cash to repurchase shares.

We paid a $3 special dividend and the stock price rose 28% in 2012.

And now we are establishing a regular dividend, maintaining the ability to repurchase shares.

In conclusion, 2012 was a tremendous year.

I have the privilege of leading a great team here at Domino's from committed and passionate franchise owners to strong visionary leaders in our management ranks and team members that bring positive energy to our stores, the success we drove in 2012 could not have happened without the commitment of all of them.

I want to thank our shareholders for their trust and loyalty and I look forward to strengthening your commitment to the brand in 2013.

With that, operator, I am ready for questions.

(Operator Instructions).

Brian Bittner, Oppenheimer.

Great year, everybody.

Real quick question on just kind of industry dynamics and where you think your Company sits right now.

You know, a lot has changed in the industry in the spending environment since your fourth quarter ended.

You have had some softness across the industry.

What are you guys seeing in the overall pizza space and at the end of the day, do you think that your new pan pizza, the technology tailwind you have, all the things from a bottoms up standpoint, do you believe you kind of are -- have the ability to negate these slowing trends that we are seeing across the industry?

Brian, I'm not going to get into kind of first quarter obviously but I guess what I would say is nothing that has been happening in terms of kind of the governments and what's happening there has been a surprise and we have been talking about value for a long time.

We've been delivering value for a couple of years and it has been delivering good results for us.

So really no change on that front and kind of what happened in January did not come as a surprise.

Pan pizza clearly performed very, very well, I think even exceeded our expectations a little bit and technology has continued to move along nicely.

So I'm not going to get into Q1 as I know you know I won't, but what I would say is that nothing that has happened in the first quarter has been a surprise in terms of what's happened with the government and all of it.

So we were prepared for that.

We are doing what we expected that we needed to do to kind of meet that environment.

Okay, I figured I'd take a stab at it there.

As far as your dividend, how did you decide on the amount of the dividend?

Was it a payout ratio as a percent of earnings or was it some other type of calculation?

At the end of the day, how are you going to think about growing this dividend into the future?

Again, is it going to be based on a payout ratio?

Is there some type of just growth you want to sustain the rate at going forward?

How are you thinking about that?

I think the answer is we wanted it to be a meaningful dividend.

It's kind of 35% to 40% of our net income for last year and roughly a third or so of our free cash flow.

I think free cash flow last year came in at about $146 million, so it still leaves us $100 million of free cash flow on last year's number that's we can use flexibly.

And so I think the answer was this is an environment where there are a lot of investors looking for yield.

The consistency of our cash flow lends itself to being able to do this.

We wanted to give people a material yield but at the same time maintain some flexibility with still incremental free cash flow to make decisions going forward on how we are going to spend it.

So that's really the thought and as to what the future is going to be, that is going to be decisions we are going to make in the future as we see how the business is growing and developing.

Okay.

Last question that you may or may not answer, as far as the pan pizza, are you able to give us an idea of what percent of the order mix that was in the fourth quarter and possibly what the effects on the average ticket were for the overall business?

What I can tell you is while I am not going to get into the specific mix, because I know our competitors would love that number, as I think you knew, the answer is it did exceed our expectations a little bit and we did finish the year after a first half where order counts had been down, we were strong enough on order counts in the second half of the year and particularly in the fourth quarter that we finished with modestly positive order counts for the year.

So the overall effect was great.

We definitely drove more customers into the franchise, not going to give the specific number on mix.

But I will tell you that it was a bit ahead of our expectations.

Okay, thank you and congratulations.

Michael Kelter, Goldman Sachs.

I wanted to ask about the switch from 5.5% national advertising to 6%.

Can you give us an idea of how much your overall ad impressions in the US might be up in 2013 as a result of the shift?

Yes, Michael, the answer is it will be up somewhat.

You've still got media inflation to offset.

You will see some of this going to digital, which as opposed to just mass media advertising, and importantly, as I said my prepared remarks, our recommendation to our system is that this is a shift in spending, that this is not an incremental spend, but that they are taking basically an equal amount out of their local spend which is mostly print and moving it to the national level because we're just simply seeing a better return on investment of those dollars.

I think what is most important in it frankly is that our system had the confidence and the trust in what we are doing and the results that we have been driving to make that commitment to us.

So I think the answer, Michael, is you are going to see some increase in mass.

You will see probably a little more increase in digital where we continue to have a great return on investment, but it should be a shift in spending, not necessarily in the totality of their advertising spend a net increase.

Then on a different topic, your franchisees in international opened 75, 80 new units, net new units in 2012 and I am curious if you open many more than that in 2013, you'll be pushing through the upper limit of that 4% to 6% unit growth guidance that you just gave.

And I ask partly because the public franchisees that are out there are all talking about growing more units for you next year.

And at your Analyst Day, you talked about some of the secondary countries gaining speed and growing more units for you, so might that 4% to 6% range turn out to be almost antiquated before the year starts?

Michael, first of all, it's a long-term forecast.

You said something about 75 stores that I didn't get at the beginning.

We opened 492 net internationally for the year.

You said something about 75 and I didn't --

That was for the fourth quarter.

I wasn't clear, sorry, or maybe I got it wrong.

Either way, the question stands.

I'm not sure if I got something wrong but the question about getting through the 6% number, it seems like that's something that you will be able to do with relative -- maybe relative ease.

You know, we've got a bigger base.

We finished the year at over 10,200 so you would have to be -- we would have to be well north of 600 net stores and last year we were just a little over 500.

So that would be -- we were right in the middle of that range last year where we were and that is our best guidance for where we think we are going to be is kind of that 4% to 6% on a long-term basis.

Okay, just for clarity, the 75 to 80 units, was how many more new units they built for you this year versus the prior?

Ah, okay.

It was a net increase, got it, got it.

Look, it was a terrific year for us on store growth and part of that is what led us to increasing the range on net openings to kind of the 4% to 6% range.

But now I get it on 75.

That was the net increase in the openings versus the prior year.

But no, that would be a pretty big increase to get us over the top of that 6%.

All right, thanks.

Jeff Bernstein, Barclays.

Just a couple of questions.

First on the US business with the new menu that you've implemented over the past couple of years, it's obviously been an evolution.

It seems like it's perhaps changing the mix of customers.

I'm just wondering if you could talk about your delivery business versus your take-out business in terms of the growth rates of both how you think about profitability for both, just kind of thoughts in terms of the different ways people use your brand?

Yes, so carry out has grown a little bit faster than delivery over the last few years but we are getting growth from both sides of the business.

But in the overall category, particularly going back even a little bit longer term, carry out has clearly been a little stronger than delivery if you go back kind of three to five years.

From a profitability standpoint, the ticket on a carryout customer is lower than the ticket on a delivery customer, but your costs are also lower because you're not delivering to them.

So net-net we are relatively agnostic between -- from a profit standpoint on carryout or delivery.

They are both nicely incremental for us when we pick up new orders on either side.

So I think the one thing in there is carry out has definitely been a little healthier than delivery over the last few years.

Got it.

And then just on the advertising spend that you talked about just to clarify, I know you had said it's going up from 5.5% to 6%, but you're saying -- what did the franchisees spend in total?

Presumably it well above that and they are just shifting -- I'm just trying to figure out what the franchisee paid in total because it sounds like you are saying they're not going to increase their spend, it's just moving 50 basis points to you.

Yes, typical is that they are spending a couple percent more.

So they got -- they've got 2% or so more that they are spending on mostly on print, so the coupons that you are seeing showing up in the Sunday papers and in your mailbox.

And we are simply seeing a better ROI on the activities that we are doing at a national level than we have seen on some of the local.

We did a lot of research around it kind of media mix modeling and went back to them with a recommendation and said we think you should keep your overall spend consistent with what it has been but shift 0.5% out of your local into the national.

And that was approved across the board so now everybody does the same thing?

Yes.

Got it.

And then lastly, the international, I would say very impressive run and you mentioned that it is obviously not all rosy outside the US.

You highlighted some of the markets that surprised you to the upside.

I'm wondering just because you have a better view of the world perhaps than we do and maybe the two-year trends a little bit I am wondering whether there were any markets where they are starting to see increased pressure or slowing trends?

What I would tell you is what we have been most worried about, and I think you have heard me say this before, has been Europe and it just hasn't been showing up in the numbers.

And I think you have seen in the restaurant industry you've seen a little bit more pressure there than the other regions, and it hasn't shown up in our numbers.

This was another quarter where we were watching it carefully, and as I mentioned in our prepared remarks, Spain actually finished positive in the fourth quarter, which was a bit of a turn for us.

So that's it.

There are some smaller markets that have been negative.

I've talked about Greece in the past and there's certainly few others out there, but overall geographically been pretty strong everywhere.

Great, thank you very much.

John Glass, Morgan Stanley.

Just going back to the pan pizza introduction, the idea was this is a new product platform for you and maybe there were some customers you hadn't reached before.

Then you also said a lot of the orders came from online, which maybe suggested the existing user base was using it.

So maybe directionally how many -- do you think you got new customers to come into the brand?

Have there been lapsed users or were you just really getting your existing base excited about a new product and they were buying more of it?

John, I think really what we saw is there were occasions.

We brought in some new customers, but I don't know that it brought in any more than we are typically bringing in.

I think what we saw more was customers who already did business with Domino's that would take their pan business elsewhere started giving us some of those occasions.

And I think that was really the primary thing that was going on.

Got you, okay.

Then just -- Mike, just a couple of questions for you.

One, the distribution business grew a lot.

You explained that it was the various there.

But relative to the first three quarters distribution and revenues grew substantially more and there was a comment about mix I think.

What was -- was there something specific?

Was it the pan that drove more distribution mix or what else was in the quarter that may have driven that unusual amount of growth?

The pan pizza drove a lot -- we measure volume in our commissaries in pounds and the pan pizza volume drove a lot of pounds for our commissaries.

Pan pizzas are just heavier than normal pizzas?

It's heavier.

You are also -- there's more toppings on it.

You're selling a little more cheese.

(multiple speakers)

We had very nicely positive order counts, too.

We just simply had more traffic whereas we were kind of fighting traffic earlier in the year.

But your comps were -- was your traffic above your comps then for the fourth quarter?

Our traffic above our comps?

Was traffic growth in excess of the total comp growth?

It was in that range.

It was in that range.

We had very strong order comp growth for the fourth quarter.

Okay interesting.

Then just on the change in the compensation expense, I understand it this year but it sounds like it's a permanent or at least three or four year phenomenon where you've got to expense this incremental compensation, non-cash compensation over a period of time.

Would that be right and would it be about this order of magnitude in future years?

It is -- because we have changed the vesting period on both this grant and on future grants from three years to four years, it will be spread over four years and it would probably be the same or slightly lower in the next three years.

We will also have slightly lower non-cash comp on the grants that would be given in a typical basis because they will also be spread over four years in the future instead of three.

Then just one last one.

Is the shift from local to national advertising you cited sort of couponing or the print as being a reduction.

Are you actually able to coupon less now because of the strength of the brand and new products, you will actually be able to reduce the amount of couponing or is it just -- is that a false read through from what you said about the shift?

You know, it's all about mix, so it's not that we necessarily can promote less or be out there with less activity.

It is just simply we have gotten pretty good at reading the return on investment for the dollars that are being spent and the return that we are seeing from activities that are being directed nationally are better than the returns we were seeing from local activities, which are mostly about the print.

And so we shifted the dollars that way.

So it's not necessarily that you can be less promotional or that we are sending out less deals, it's just about how you communicate them and how the customer reacts to them and we are simply getting a better return from kind of nationally driven activities -- read, mass media and digital for the most part versus the print.

Got you.

Thank you very much.

Mitch Speiser, Buckingham Research.

Thank you very much.

The two Company stores that you opened in the US, were they the new prototypes and can you talk about how they are performing in terms of carryout versus delivery or any differences you are seeing in the customer experience?

Yes, so I think one of them was a reopen of a store that had burned down.

But we did do it in the new image.

But the answer is we are now up to something in the range of 100 stores that have gone through a reimagining process or were new stores that opened in the new image.

We are not ready to kind of give conclusions around that.

We need to kind of see how those stores perform over a period of time.

We think there is going to be a need to reimage at some point but we are trying to watch these and get a couple of quarters under our belts before we draw a conclusion from it.

So early read, customers are happy.

We like what we are seeing, but it is still too early to kind of draw a conclusion.

Okay, thanks.

With the business going well in the US and it looks like US units are beginning to uptick a bit, but still as you noted modest, have you begun to rethink franchisee incentives at any level to drive more accelerated US unit growth?

We have got targeted incentives out there and they are targeted at some specific franchisees that have been willing to commit to kind of strategically growing their businesses with us as well as some individual markets.

We have always had incentives out there.

We have shifted them around some and we are kind of happy with the early returns on that.

But it's kind of early on.

As you say, at 21, it's still relatively modest.

I think longer-term what is important is we think we had another year -- we know we had another year where franchise level profitability was up and that's ultimately what is going to drive increased store growth is their confidence in a strong return on investments.

So we are spending a lot of time there on how to we increase profitability even more?

How do we make their return on investment even stronger?

That is ultimately really what's going to drive the store growth for us.

Have you discussed what the cost of the new prototype is versus a legacy type of store?

Yes, it's somewhat more expensive than the previous kind.

If you build in kind of the same footprint with roughly the same kind of layout as we have today, which is the lobby kind of at the front of the store, it's relatively in line with existing costs.

If you do kind of what we're calling the pizza theater, which is very open and the lobby is kind of going down the side of the store and is likely going to be a somewhat bigger footprint, that's going to be somewhat more expensive.

And as we do more of them we drive more efficiencies in those costs so we would hope to see those costs come down.

But as we are doing them now they are certainly a little bit more expensive than our past design.

Okay, and I think my last question -- just on the national media in general, does that include any national couponing?

No.

Great, thanks very much.

John Ivankoe, JPMorgan.

It's interesting to see as your business migrates more to online and mobile ordering, what have you, and there's more funds allocated to national media that there is increasingly the likelihood that you can really begin to take some people out of the stores or maybe just reallocate some people away from things like answering the phones and what have you.

So are you kind of getting to that point of critical mass where you are actually going to be able to lower labor hours or just reallocate labor hours very specifically even on an increase in order counts?

Yes, we are definitely in that range where -- and I will tell you that early on, John, we didn't see as much of it as we would have expected early.

It did take some critical mass.

When we were at kind of 10% or 15%, we thought we were going to see labor efficiencies and we really weren't.

As we have gotten up to the level where we are now, kind of north of 35% in sales, we definitely see that now.

Interestingly, one of the things that Mike mentioned from a margin standpoint on our corporate stores was around utilities.

Part of that is phone lines.

We have gone through and gone back and realized as we are taking fewer orders in the stores, we don't need as many order taking stations and we don't need as many phone lines in the stores and about $30 a line and you take a couple of those out and spread that out over a year, it's a (inaudible) or two.

And so there are just a couple of ways where it shows up over time.

But yes, at this level, we are certainly in the range where you start to see some labor efficiencies.

Is there significantly more to go?

I know you do have a national call center which kind of acts as a rollover from what I understand, but the combination of that and online, is it still like hundreds of basis point opportunity over the next five or 10 years?

No, from a labor perspective it's not going to be that much.

There still is certainly more and there still are stores that are below the average clearly, and as they ramp up more, you will get some more savings there but it's not going to be hundreds of basis point on the labor line.

Okay, secondly and I apologize if I just didn't understand this, the increased incentive comp in 2013, was that just more or less a reward for what you guys have achieved over the last three years?

Was it something about retention or what have you that happened or I think to an answer to the previous question, was it just around the timing of what -- the way those options were going to be vested?

I think there are a couple of things.

I think number one, it was a reward to the management team for performance and to retain us over the medium and long term.

At the same time, we did move from a three-year vesting to a four-year vesting, which I think is also healthy from a retention standpoint.

But it is also something that we had a DER policy, a dividend equivalent rights policy in effect in our option plan.

It doesn't tie directly because the IRS has had rulings on DERs and kind of how those are treated.

So it's looking at an initiation of a regular dividend and the effect of that on the value of stock options but it's also just around kind of rewarding and trying to retain and incent the management team.

But this at least, some component of this should be viewed as an isolated 2013 event that may or may not recur in 2014?

Yes, that's right.

And it's just the reason you talked about recurring is as they vest over four years, you are going to have some expense here, but no, that's absolutely right.

This is going to be an unusual grant.

It will get expensed over a period of four years but it's certainly not something you should expect on a recurring basis in terms of more new incremental grants like this.

Okay, all right.

I understand.

Thanks so much.

Mark Smith, Feltl.

First off, just wondering if you can give us any insight into the health of the franchisees domestically, what they are seeing in financing?

And then internationally outside of the public guys, any insight you can give us into the health and desire to continue to grow?

This is Mike.

On the US side right now, franchisees that have a desire to grow, that have got experience are in great shape in terms of their access to financing.

If you don't have a store and you want your first store, still real tough.

If you've got a lot of stores, a lot of experience, most of our big franchisees are in very good shape.

They have great access to money fairly cheaply.

In the in between guys that have got three, four, five stores and maybe up to 20 over the last few months, their access to financing has become a lot better than what it was a year and a half or two years ago.

We have certainly seen a lot more opportunities for them to grow if they desire.

Outside the US, we have seen obviously great growth last year.

We had 492 net stores.

We haven't seen any indication that there are many franchisees that were part of that growth that intend to slow down.

Okay and then secondly, this is may be too anecdotal but yesterday I was in California, bought gas for $4.69.

Can you just walk us through historically with gas price spikes what you've seen from the consumer, also the impact on distribution and at the store level from delivery?

Historically we have not seen a lot of change in the consumer behaviors as gas price spiked and we also haven't had -- when you think of the gas prices going up and you think of us as a delivery company, typically the first though is well that means a lot more reimbursement to drivers.

That means expenses go under a lot of pressure.

There is more reimbursement to drivers, but it's not a huge additional cost at the stores.

When we see the gas price spikes, we typically have from our history a little more concern about how over time that can feed into the overall cost of the food supply, our ingredient costs.

We have been -- we just provided information earlier in my comments that with what we see out there right now it's still looking at 3% to 4% for the year and we aren't seeing a change to that at this point based on the ag economists and the people that we use for inputs into our estimates.

But yes, that's the big deal.

We saw that in 2007 when gas prices spiked up a lot, it started to flow through into commodities and that's honestly where our biggest concern is when you look at gas prices.

Consumer behavior reimbursements, we just haven't seen that much in the past that that's material.

The bigger issue is if it starts to flow through commodities.

Great.

Thank you.

Peter Saleh, Telsey Advisory Group.

(inaudible) on the quarter.

I just wanted to ask if you guys could just take us back a step, I believe in 2010 there was a shift as well on the advertising from more local to national.

So if you could remind us what that shift was and kind of just related to what's going on today?

Yes, in 2010 we went from 4% to 5.5% nationally.

There was -- there had been at that point kind of a 2% minimum required local co-op spend so it was money that was being collected at DMA by DMA and would be spent largely on kind of local television and some radio.

So in 2010 what we did was we eliminated that 2% requirement on DMA level spend or co-op spend as we called it, so there were kind of three buckets then and we went from three buckets to two buckets.

We eliminated the 2% requirement.

They could still do it if they chose but we eliminated the 2% requirement and added 1.5% to the national level.

So the requirement for them actually went from 4 plus 2 down to 5.5, so it was actually a reduction in the requirement of 0.5%.

We were comfortable doing that then because we could see the efficiencies that we were going to get by making that shift and we saw those and 2010 was clearly a very, very strong year for us with the relaunch at the same time.

But you got that exactly right, so we had a shift back then.

It increased the national at that time from 4% to 5.5%, offset by the 2% requirement going away at the co-op level.

What we have just done is move from 5.5% to 6%, so actually the requirement was returning to kind of where it had been then but with a recommendation to them that they probably fund that by a commensurate reduction in their local spend.

Okay, that's all I've got.

Thank you.

That was the last question.

Are there any closing remarks?

No, I just want to thank you for joining us today and we look forward to reporting our first-quarter results to you on April 30.

Thank you, everyone.

This concludes today's conference call.

You may now disconnect.