達美樂 (DPZ) 2017 Q4 法說會逐字稿

Good morning.

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

At this time, I would like to welcome everyone to the Fourth Quarter 2017 Earnings Call.

(Operator Instructions) Thank you.

Tim McIntyre, you may begin your conference.

Thank you, Amy, and hello, everyone.

Thank you for joining us on the call today about the results of our fourth quarter and full year 2017.

As you know, this call is primarily for our investor audience, so I kindly ask that all members of the media and others to be in a listen-only mode throughout the call.

In the unlikely event that any forward-looking statements are made, I refer you to the safe harbor statement you can find in this morning's release and the 10-K.

As always, we will start with prepared comments from Domino's Chief Financial Officer, Jeff Lawrence; and from our Chief Executive Officer, Patrick Doyle; followed by your questions.

With that, I'd like to turn it over to CFO, Jeff Lawrence.

Thank you, Tim, and good morning, everyone.

We are thrilled to report our results for the fourth quarter and full year fiscal 2017.

During the quarter, we continued to build on the positive results we posted during the first 3 quarters of the year and delivered strong results for our shareholders.

We continue to lead the broader restaurant industry with 27 straight quarters of positive U.S. comparable sales and 96 consecutive quarters of positive international comps.

We also continued to increase our store count at a healthy pace as we opened more than 400 net new stores in the fourth quarter.

Our diluted earnings per share was $2.09, which is an increase of more than 41% over the prior year quarter.

This increase primarily resulted from strong operational results and a lower effective tax rate.

With that, let's take a closer look at the financial results for Q4.

Global retail sales, which are the total retail sales at franchise and the company-owned stores worldwide, grew 11.7% in the quarter.

When excluding the impact of foreign currency, global retail sales grew by 9.9%.

This global retail sales growth was driven by an increase in the average number of stores opened during the quarter and same-store sales growth.

Same-store sales for our domestic division grew 4.2%, lapping a prior year increase of 12.2%.

Same-store sales for our international division grew 2.5%, lapping a prior year increase of 4.3%.

Breaking down the domestic comp.

Our U.S. franchise business was up 4.2%, while our company-owned stores were up 3.8%.

These comp increases were driven by ticket and, to a lesser extent, continued order count growth.

The ticket growth in the quarter resulted primarily from a higher number of average items per order in Q4 as compared to the prior year.

On the international front, all 4 of our geographic regions were, again, positive in the quarter, with Europe and the Americas leading the way.

Canada, Russia, Turkey and India were among the markets that performed particularly well during the quarter.

Our Q4 2017 comps were negatively impacted when compared to the prior year as our Q4 2017 fiscal calendar did not include New Year's Day.

We estimate that both our domestic and international comps were negatively impacted by approximately 0.5 point by this calendar shift in Q4 2017.

We expect Q1 2018 to be positively impacted by this calendar shift.

On the unit count front, we are very pleased to report that we opened 96 net domestic stores in the fourth quarter, consisting of 102 store openings and 6 closures.

For the full year, we opened 216 net domestic stores.

We are also very pleased to announce that our international division added 326 net new stores during Q4, which included the opening of our 9,000th store internationally.

The 326 net new stores were comprised of 339 store openings and just 13 closures.

For the full year, we opened 829 net new stores in international.

As a reminder, we converted more than 250 stores in 2016, which significantly impacts the year-over-year comparison.

Our international growth continued to be strong and diversified across markets, driven by outstanding unit-level economics.

When adding the domestic and international store growth together, we opened 1,045 net new stores globally in 2017, demonstrating the franchisees' continued excitement and commitment to our global brand.

Turning to revenues.

Total revenues for the fourth quarter were up $72.1 million or 8.8% from the prior year.

This increase primarily resulted from 3 factors: first, higher supply chain center food volumes, driven by strong U.S. comps and store growth; second, higher international royalties from store count growth and increased same-store sales as well as the positive impact of changes in foreign currency exchange rates; and finally, higher domestic same-store sales and store count growth resulted in increased royalties from our franchise stores and higher revenues at our company-owned stores.

Currency exchange rates positively impacted international royalty revenues by $2.1 million in Q4 versus the prior year quarter due to the dollar weakening against certain currencies.

For the full fiscal year, foreign currency negatively impacted royalty revenues by less than $1 million.

Now moving on to operating margin.

As a percentage of revenues, consolidated operating margin for the quarter increased to 31.5% from 31.1% in the prior year, driven primarily by our global franchise business.

The operating margin at our company-owned stores decreased to 24.6% from 24.8%, driven primarily by higher labor wage rates and insurance expense.

Lower occupancy cost and lower sales-based transaction fees benefited the operating margin and partially offset these decreases.

The supply chain operation margin decreased slightly to 11.1%.

The primary drivers of this decrease were higher labor, delivery and insurance expenses as compared to the prior year quarter.

Procurement savings benefited the operating margin and partially offset these increases.

Before we leave operating margins, I'd also like to note that franchisees in both the U.S. and Canada continue to share in our success, with record profit-sharing checks that they have earned in partnership with us with great execution and performance.

As I mentioned many times before, we expect to make additional investments in supply chain in the near to medium term to keep up with our rapid growth.

Let's now shift to G&A.

G&A increased by $1.6 million in the fourth quarter versus the prior year quarter, driven primarily by our planned investments in technological initiatives, including investments in e-commerce, our point-of-sale system and the teams that support them.

Please note that these investments are partially offset by fees reported as revenues that we received for digital transactions from our franchisees.

Continued investments in other strategic areas also contributed to the increase in G&A.

Lower performance-based compensation and a $4 million pretax gain on the sale of 17 company-owned stores to franchisees partially offset these increases.

Moving down the income statement.

Net interest expense increased by $5.3 million in the fourth quarter primarily as a result of increased net debt from our 2017 recapitalization.

This was partially offset by a lower weighted average borrowing rate of 3.8% as compared to 4.6% in the prior year quarter.

Our reported effective tax rate was 31.7% for the quarter.

There was a $6.8 million decrease in our fourth quarter 2017 provision for income taxes as a result of excess tax benefit on equity-based compensation.

This resulted in a 5-percentage point decrease in our effective tax rate.

We expect that we will continue to see volatility in our effective tax rate related to equity-based compensation.

As a result of the federal tax reform that was enacted before year-end, we revalued all of our deferred tax assets and liabilities, and the effect on the reported tax provision in Q4 was not material.

When you add it all up, our fourth quarter net income was up $20.6 million or 28.3% over the prior year quarter.

Our fourth quarter diluted EPS was $2.09 versus $1.48 in the prior year quarter.

Here is how that $0.61 increase breaks down.

Our lower effective tax rate positively impacted us by $0.19, including a $0.15 positive impact related to excess tax benefits on equity-based compensation.

Lower diluted share counts, primarily as a result of share repurchases during the year, benefited us by $0.18.

Higher net interest expense resulting from a higher net debt balance during the period negatively impacted us by $0.07.

And most importantly, our improved operating results benefited us by $0.31, including $0.05 from the gain on the sale of company-owned stores and a $0.03 benefit from the impact of foreign currency exchange rates on royalty revenues.

Now turning to our use of cash.

First and most importantly, we invested more than $90 million in capital expenditures for the full year as we continue to aggressively grow our technology capabilities and invest in supply chain to keep up with our rapid growth.

During the fourth quarter, we repurchased and retired approximately 277,000 shares for $51.5 million at an average purchase price of approximately $186 per share.

We also received and retired nearly 660,000 shares in connection with the final settlement of our $1 billion accelerated share repurchase program, which we discussed on the Q3 call.

For the full year, we repurchased 5.6 million shares for $1.06 billion at an average price of approximately $191 per share.

During the fourth quarter, we also returned $39.7 million to our shareholders in the form of quarterly dividends and made $8 million of required principal payments on our long-term debt.

Subsequent to year-end, on February 14, our Board of Directors increased our quarterly dividend approximately 20% to $0.55 per share and authorized a new program to repurchase up to $750 million of our common stock, which does replace our previous program.

As always, we will continue to evaluate the most effective and efficient capital structure for our business as well as the best ways to deploy our excess cash to the benefit of our shareholders.

As we look forward to 2018, I'd like to remind you of our 2018 outlook that we shared with you at our Investor Day in January.

We currently project that the store food basket we use in our U.S. system will be up approximately 2% to 4% as compared to 2017 levels.

We estimate that the year-over-year impact of foreign currency on royalty revenues in 2018 could be flat to positive $4 million.

If foreign currency rates today held for the full year, that impact would be more favorable.

In 2018, we expect our gross capital spending to be approximately $90 million to $100 million as we will continue to invest capital into technology innovation, supply chain capacity and capabilities, including our new supply chain center expected to open later this year and, to a lesser extent, company-owned store openings.

We expect our G&A to increase due to our investments in e-commerce and technological initiatives.

We expect total G&A expense to be in the range of $380 million to $385 million for 2018.

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

Separately, I would also like to remind you that we will be adopting the new revenue recognition accounting standard in the first quarter of 2018.

We will be required to report the franchise contributions to our not-for-profit advertising fund and the related disbursements gross on our P&L.

We are currently assessing the proper classification of expenses on our P&L as a result of this change.

We do not expect this guidance to have a material impact on our reported operating or net income.

However, this new guidance will result in us reporting significantly higher revenues and expense, currently estimated to be well north of $300 million.

Overall, our tremendous momentum continued, and we are very pleased with our results this quarter and for the full year.

We will remain focused on relentlessly driving the brand forward and providing great value to our consumers, our franchisees and our shareholders.

Thanks for joining the call today, and now, I will turn it over to Patrick.

Thanks, Jeff, and good morning, everyone.

Many of you attended or listened to our Investor Day last month.

And while the focus was on the state of the business, our strategy and outlook going forward, there was obviously some additional news that I addressed at the beginning of the event.

While we have the opportunity today, I wanted to briefly reiterate one of the key accomplishments I noted in deciding to move on to the next chapter following my time at Domino's, succession, and my emphasis on leaving the business in the hands of incredibly strong, capable leadership.

This was an extremely important element of the decision process for me, and I look forward to more of you getting to spend time with Ritch and gaining understanding of his skills, attributes and strategic approach as the next leader of Domino's.

With our transition now underway, I want to officially welcome Ritch to the table for his first earnings call since the announcement and note my confidence in passing the leadership baton to him this July.

I'll provide further remarks on this during my final earnings call in April, so let's get to what's most important, our outstanding 2017.

Make no mistake.

I am very pleased with our quarter and the contribution to our overall 2017 performance, which continues to set the standard within our industry.

We continue to set the bar high and deliver on bottom line earnings performance, which we did nicely, yet again, in the fourth quarter.

International full year same-store sales were within our 3 to 5-year guidance, while our full year domestic results continue to impress, well ahead of the top end of our guidance range, featuring a plus 30% comp on a 3-year basis.

Unit growth continued to progress domestically and, combined with the reliable engine of international store growth, we are delivering on the healthy blend of retail sales growth contribution we have discussed steadily throughout 2017.

This is important.

Both our corporate performance and, more importantly, that of our franchisees is dependent on a mentality centered around long-term enterprise growth that doesn't just come with either comps or units within a silo.

It takes both to truly build and fortress, and I'm very pleased at the way this balance continues to come into shape.

I discussed at last year's Investor Day my thoughts on the importance of store closures and how it is often a key and underrated metric on measuring the stability and potential for any business.

It's been an issue for many within our category.

With that, our 13 domestic closings for the year, let me repeat that, that one just one more time, 13 domestic closings for the year, combined with only 62 around the rest of the world, for a total of 75 global closures in 2017, was the lowest amount of closures we have had in over 2 decades and one of the more favorable signs highlighting the continued momentum around our model, performance and unit economic strength within this business.

Our U.S. results, in the face of the most difficult fourth quarter lap in our recent history, were solid.

In addition to our 27th consecutive quarter of same-store sales growth, I am extremely pleased with the net 216 domestic stores for the full year and the impact it had on our impressive retail sales growth, which cannot be understated.

I'm proud of the team and our U.S. franchisees, who continue to show commitment to aggressive unit growth, which wasn't necessarily the case a few years back, all while staying focused on investing and reimaging.

We are now substantially completed and excited for our customers, particularly those helping grow our carryout presence, to get used to having one of the freshest new images and store designs in QSR be truly market-wide.

I'm also very pleased, for the first time in over a decade, to say that in 2017, the U.S. was our fastest growing global market in terms of store growth.

Year-end results always remind me to note the extraordinary performance and solid relationship and rapport we continue to demonstrate with our outstanding franchisees, a group that is absolutely second to none.

We came into 2017 wanting to maintain this impressive alignment, and I credit both our company and franchisee leadership for beginning 2018 in that exact same position of strength.

While this cannot always be measured, the importance of this can in no way be underappreciated.

To our franchisees who have impressed me with their continued refusal to be complacent, I thank you for continued passion for our customers and our brand and look forward to winning together in 2018.

Moving on to international.

We have now reached 24 consecutive -- 24 years of consecutive quarterly same-store sales growth.

This unprecedented and rather unbelievable streak is a continued testament to a team focused on retail sales growth with a focus on fortressing territories and building to keep a leg up on competition for the long term.

I am pleased our full year results were within the 3 to 5-year outlook.

And while our comp for the quarter was below our range and has shown a bit more volatility than usual of recent, I am confident the business will continue to deliver strong top line results and, more importantly, continue to deliver tremendous unit growth, 825 -- 829 net new stores for 2017, to be exact.

The long-game strategy of fortressing against the competition is highly visible, most notably and recently in India with the departure of a competitor.

We didn't comp them out of the market, but instead relied on unit economics that encouraged rapid growth and continue making it extremely difficult for others to get their foot in the door.

This approach, which has been executed globally, is perhaps one of the more exciting strategies around the future of our business.

Needless to say, it's working.

The dialogue with all markets continues, particularly within the Asia-Pacific region that was fairly soft during the fourth quarter.

Our master franchisee partners are assessing structural and leadership changes and will address the situation that we see as fixable and correctable within the relevant markets.

The remainder of our regions and territories performed quite nicely, including our large public master franchisees notably in the U.K. as well as India, under its new leadership.

All in all, while there are areas to correct and continue to improve, I am pleased with the results this extremely strong model continued to produce and excited as ever about our future and continuing to aggressively grow and fortress in all markets and territories, driven by our strong master franchisee base that continues to get it done.

We continue to set the bar on the importance of investing and innovating within technology.

2017 featured many highlights, including growth of our AnyWare suite of ordering platforms, with another strong year for digital loyalty, the emergence of voice and Alexa as a growingly popular ordering option and, more recently, our first meaningful test of self-driving vehicle delivery.

As we discussed at our Investor Day last month, we are the technology disruptors and, as is shown by the technology fee increase our franchisees committed to beginning this year, pledge we will invest to stay ahead in 2018 and beyond, making every effort to keep the advantage we have worked so hard to build.

In closing, I'm pleased with the fourth quarter and feel tremendous about the momentum of our brand and business coming off of an outstanding 2017.

We continue to rely on a long-term strategy and approach and emphasis on customer insights over our own, a disregard for complacency and playing offense over defense in extending the competitive leads we have built, all on the path of reaching our goal of global dominant #1.

Thanks, and we'll now open it up for questions.

(Operator Instructions) Your first question comes from the line of Peter Saleh with BTIG.

So I just wanted to ask about the U.S. comp.

I know the domestic number was a 4.2%.

There was 50 basis points impact from New Year's Day.

But I think even if you include that, there was a pretty sizable deceleration on a 2-year stack basis.

Anything else you guys can call out in the U.S. market that maybe showed some softening this quarter?

No.

I mean, we really feel good about it.

I mean, if you kind of adjust out the New Year's Day, which will come back in the first quarter kind of the same 0.5 point, rolling over at 12.2% from the previous year with accelerating store growth through the end of the year, we feel very good about it.

Okay.

And then on the international business, I think you said the Asia-Pacific region was a little bit softer.

Can you maybe elaborate a little bit on what you're seeing there and what you're -- what steps you think you will be taking to resolve this issue?

Yes.

So you probably saw that Domino's Pizza Enterprises out of Australia already released last week.

There was some weakness in Japan, in particular, but overall, we feel very good about the business.

They've had a leadership change in Japan now.

We're getting a little focused on value there.

It's been a great business.

I think it's going to continue to be a great business there.

And you may have seen in their release, they already called out the first, I think, 5 or 6 weeks of results heading into the new year, and those were already doing better.

So I think we feel good about the business over the medium and long term.

And again, you already saw some re-acceleration of that business early in 2018.

Great.

And then just last question for me.

On the G&A side, your G&A was a lot lighter than what we were anticipating.

I know you called out the gain on the sale and the lower stock-based comp.

Was there anything else in the G&A?

Did any of the projects get pushed into 2018 that were supposed to be in 2017?

Anything else?

Or are those the 2 items in G&A that would explain the difference versus your guidance?

Pete, it's Jeff.

First thing I would tell you is we're full speed ahead on all of the strategic investments.

We're not going to slow down on that.

You continue to hear us say that.

So everything that we wanted to do, we did, and now we'll continue into 2018.

The little bit of walking is really the 2 items you mentioned.

One was the gain on the store sales to franchisees, about 17 stores in Q4.

And the other one was we didn't do as well versus our plan this Q4 compared to Q4 back in 2016, so your year-over-year comparison there also led to lower overall expense.

But most importantly, the strategic investments are on track, and we continue to invest in those areas.

Your next question comes from the line of Karen Holthouse with Goldman Sachs.

This is, I think, the first time we've heard you talk about some procurement savings on the supply chain side.

Could you give any sort of color around that, magnitude and then sort of how to think about the cadence of that as we move through next year?

Yes.

I mean, really, the procurement savings are really what you would come to expect from a brand that's really scaling pretty rapidly and has a little bit more market power than it had even 2 or 3 years ago.

So our team in supply chain, fantastic job up there, just continuing to source very high-quality, safe food ingredients, but at a lower overall cost.

And of course, that flows through to the benefit of supply chain margin, which franchisees share with us 50-50 there, so everybody wins in that.

But the important thing is we're not going to degrade the product in that process.

We're going to make sure that we continue to improve the ingredient quality and also drive down food cost at the same time.

Yes, the only thing, Karen, I would add to what Jeff just said is you did see confirmation from our competitor, their retail sales last year.

We are now bigger than them, which we called out at Investor Day.

But I will tell you, our terrific procurement team may have made sure that all of our supply partners are aware of the fact that we are the largest and expect to be treated that way.

And so scale matters.

And the fact that we're now the largest, globally and in the U.S., in the pizza industry matters, and clearly, we're going to press that with our partners.

And then also on the distribution margins, I think one of the reasons that it's applied to the upside -- or applied to the upside has been some pretty broad spread concerns about just freight costs in general, logistics costs that we've heard through this earnings season.

And I think a big challenge has been managing through pretty large spikes on spot rate markets.

Could you walk us through or give any sort of color on how much of your distribution are you relying on third parties versus doing completely internally, where you might not be exposed to that?

Yes.

So this will probably not come as a surprise given our point of view on other parts of our business.

But we own delivery of the food to the store just like we own delivery of food to our consumers, our customers.

And so we have a very large fleet of leased tractors and trailers that enable those 2 to 3 deliveries a week to all of our stores in both the U.S. and Canada.

We have not seen any material spike of cost in our business as a result of anything going on in the spot freight market.

We're usually able to get out in front of that in a pretty good time.

And so we don't expect any pressures there, and certainly, there was no disruption for us in Q4.

(Operator Instructions) Your next question will come from the line of Will Slabaugh with Stephens Inc.

I had a question on domestic comps.

And we've seen, over the past year to 2 years, this comp is being heavily driven by transactions.

And it sounds now like that shifted a little bit in the quarter toward ticket playing a larger role.

So can you talk about what's driving that ticket growth and the average items per order, as you mentioned earlier, and how comfortable you are with ticket growth rising over time?

Yes, it's Jeff.

So again, we did a 4.2% in the quarter, roll on a 12%, a little bit more ticket than orders, but both were healthy, and both contributed to the overall comp.

We did have that 0.5-point shift again on New Year's Day, which muted it a little bit.

But really, there were a couple of different things that contributed to a little bit more ticket in the quarter, and the biggest one is the one I called out, which we just sold a little bit more food per order, which is kind of the best way to get ticket.

What it wasn't about in Q4 was us getting undisciplined around pricing or our franchisees getting undisciplined around pricing.

We remain in lockstep around delivering great value to our consumers.

The $5.99 mix and match, we were on TV a bunch with that in Q4, which is what you've come to expect.

And so as we roll into 2018, the goal is to do what we always do, which is to grow orders and just be real thoughtful about ticket and the construct of ticket.

So obviously can't comment on 2018, but there's no bad news for us in the fact that ticket was a little bit bigger in Q4.

Your next question comes from the line of Gregory Francfort with Bank of America.

Just the first one on -- I think as I look at your franchise revenue growth on the domestic side this quarter, it was up about 5% even though you had a 4% increase in units and a 4% comp.

Can you maybe explain what sort of dragged on that?

Because I know you took the fees up on your franchisees on the digital side versus last year, so I'm curious what the offset is.

And then just a second question.

Patrick, can you talk a little bit about -- I know we saw your Australian partner comment on third-party aggregators in their release.

Can you maybe update us on -- in terms of how you think about external parties from an aggregator perspective versus the delivery perspective and sort of where you're coming from with that?

Greg, it's Jeff.

I'll take the first one, and then I'll kick third-party over to Patrick for the second one.

On the royalty revenues, really, not a lot changed in there.

The contractual rates generally are still the contractual rates.

You might see a little bit of bounce around.

The one thing I would point out is we do offer some incentives for new store growth in the U.S., which, as they get going, helps to defray some of the opening costs there.

That might take down the effective rate a little bit, but again, that's been pretty consistent there.

You mentioned the technology fee which, for '17, was the same as it was in '16, so really nothing there other than the additional mix, so obviously, increasing digital generally.

Other than that, nothing really that we see bouncing around in revenues.

Yes.

And Greg, on the aggregator, we really talked about this at length at Investor Day in January.

And first of all, the comments that came out of Australia, they're testing using some of the ordering portals, but not delivery.

I mean -- and they're going to continue to control the customer experience, and we think that's very important.

A reminder, nobody does more restaurant orders digitally than us and nobody does more delivery than Domino's.

We understand the economics of that, the customer behavior related to both the ordering and delivery process better than anybody, and we've built real competitive advantage over the years by doing it ourselves.

So accessing orders and customer base is something that's been tested many places, but the delivery process and the efficiency of the delivery process is something that we know and understand very, very well.

And that's not something that you're ever going to see us outsource because we believe, as we said in January, the only way to build long-term competitive advantage is to do something yourself.

So if you use a third party, you're basically deciding, all right, this is something where we're not going to build competitive advantage.

And if you do it yourself, the only reason to do it yourself is because you think you can do it better than you could do by accessing third parties.

Your next question comes from the line of Matt McGinley with Evercore ISI.

I have a question on the international revenue growth.

It grew at around 26%, which is materially better than what would have been implied by the comp and the units and the FX.

So, I guess, the question is: What drove that increase?

Was it something with conversions now paying royalties or tech fees or AUV differences or something like that?

Yes, Matt.

It's Jeff.

It's a little bit of all that stuff.

As the older conversions start to roll off, they'll obviously start to pay a little bit more.

We also have an acceleration in what Ritch has talked about around the Global Online Ordering platform and the deployment of PULSE more globally.

Those are obviously bringing revenues into that line item as well.

And so it's a little bit of all of that stuff, which is why you're seeing the increase there.

In addition, obviously, to the store growth and the comps.

Got it.

And on the asset sales, what was the rationale for selling those stores in the fourth quarter?

It was only $4 million for, I think, 17 stores, so that would likely imply lower-than-average profit.

I'm curious what the rationale was in this quarter.

And then did that have any impact on the company and margins in the fourth quarter?

Yes.

I'll answer first and then kick it over to Jeff.

First of all, $4 million is just the gain.

That's not the sale price.

But what we've said in the past is we are always going to look at kind of our corporate stores and where they are.

These stores that were sold were stores that were a little bit further out geographically from some of our others.

We are also building stores, increasing density in some places where we're already operating.

So this is kind of within the range of, if you will, ongoing portfolio management of our corporate stores.

And the specifics on it, I'll kick it over to Jeff.

Yes, the only thing I'd add to what Patrick -- he covered it pretty well, is the sales actually took place a little later in the quarter.

So you won't see as big of an impact on any of -- on the Team USA margins or the franchise revenues.

You'll really see that flowing through in Q1.

And as far as geographical, it just happened to be a couple stores we had over on the East Coast, in the Virginia, Carolina area.

But again, that's less important than Patrick's point, which is -- it's normal portfolio management.

Your next question comes from the line of John Glass with Morgan Stanley.

First, you highlighted the carryout opportunity at the recent Analyst Day.

How did carryout relative to delivery perform this quarter?

Yes, they both did great.

Okay.

And then, Patrick, you had answered the last or a few questions ago about never wanting to outsource delivery.

But you didn't answer the question about whether the order aggregation could be something you would be willing to outsource, meaning is there an opportunity to expand the marketplace by using an aggregator resource.

Or even if you deliver them, understanding the economics have to be compelling.

Is that a real opportunity in your mind in the U.S.?

Well, it's something that we've looked at.

I guess what I would say is, first, you've got to start by saying, okay, what is order aggregation?

So I could argue today that Google is an order aggregator, right, because there are a lot of people who are looking for food, go in, and they start the process by Googling the restaurant they want to go to.

And we use that.

We buy keywords like our competitors do, and a pretty reasonable portion of our sales wind up going through portals like that.

So as those portals evolve, how we use them and the return on investment for those, we're always going to look at that.

But if you look at the largest order aggregator in the U.S. today, they're charging 15% of ticket, on average, to restaurants.

So if you're big, you're going to pay less than that, and that's without delivery.

That's something that, for us, is clearly not economic.

Our franchisees are paying $0.25, which is a little bit over 1%.

And that's why we've got our loyalty program.

We're generating the data.

It just is -- it's a terrific experience for the customer if they're going through us.

It all ties into our point-of-sale system, so it's easier and more efficient in the stores.

So the answer is never say never because pricing may change dramatically and kind of how people operate as portals may change.

So it's certainly something we're looking at, but is that a big near-term opportunity moving outside of the places where we are sourcing today?

I don't think the economics support it, but those economics may well change over time.

Your next question comes from the line of Jason West with Crédit Suisse.

Yes.

Just, one, going back to the sort of aggregator question, which I know this comes up every quarter.

But if you could talk about the mix of kind of urban sales versus suburban, if you're seeing any sort of divergence there that you may have referenced in the past.

Yes.

I mean, really no different than what we said before.

Certainly, those aggregators today are stronger in urban areas.

If you dig down into their economics, their economics -- they still struggle with how to take care of the customer, the driver of the restaurant.

There, frankly, have been more articles coming out around the struggles that restaurants are seeing in generating incremental volume out of that.

But in terms of how that's shifting, there really has not been a real change in that.

Okay.

And then the other question, just going back to the food inflation outlook, did you guys see that sort of accelerating through 2017?

And is that something that you think is kind of going to be higher as you move through the year?

Or anything on the pacing of that would be helpful.

Yes.

I mean, again, it wasn't a bunch of commodity inflation or food basket inflation for us on the whole in 2017.

Up a couple points, which was basically in the range that we told you we'd be in.

A little bit more in the back half than the front half of 2017, but again, that's kind of splitting hairs a little bit.

The point was it was pretty favorable for the restaurant, and going into '18, again, a 2% to 4% over a real good '17 year.

We don't think commodities are going to be something that has an impact -- a big impact on our store economics.

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

Patrick, in your prepared remarks, you've used the word you're fixable and correctable in relevant markets, I think, referring to international.

And I thought those were interesting words in that they, perhaps, could be put in the context of these issues of being avoidable in the first place.

I guess kind of comment on that, whether you think your franchisees can be more proactive in terms of avoiding some of these things that need to be fixed.

And as we kind of think about the corporation over the next 3 to 5 years, if you want to start getting more involved as a corporation in the affairs of the operations or maybe even a little bit more in the tactics of some of your larger international franchisees, if comps aren't what they used to be.

Yes, John.

I think it's interesting.

If you look back over the course of 2017, we had a little bit of a slowdown early in the year with the U.K., and the U.K. is very much back on track.

India had a period of time where it had slowed down and is now doing very, very well again.

I think it's just a function of -- you're always going to do your best with the research that you have and make as logical decisions as you can, but every once in a while, you just don't get it right.

And when you saw the release from DPE about Japan, they talked about a promotion during the Christmas holiday time period that hadn't worked out well for them.

And I mean, look, it was just a misfire.

And what I would point out is a reminder that they -- when they released their results, their first half results for them, that was a half, but the problem that they were talking about was all within the fourth quarter as it was leading into the holiday.

And you already then saw them talking about how they were doing at the beginning of 2018.

So part of the fixable comment was -- frankly, normally, I wouldn't talk about something within the quarter, but they had already released those numbers as part of DPE, and it was already doing better.

So clearly, it was fixable.

So I think the overall answer, John, is we are always giving opinions as asked, and we're talking to them about what we think the right approach is going to be.

But ultimately, that's the decision of the master franchisee.

And we've got phenomenal master franchisees who understand their local markets and the dynamics there better than we're ever going to.

And most of the time, because of the now multiple decades of positive quarterly performance, they do a pretty darn good job, every once in a while, they're going to miss.

And in 2017, it seemed to kind of rotate around the world who had a little bit of a miss.

But everybody is good at this, and we're confident that they can get it back on track.

And do you think the global shared services model or the global shared data model is fully optimized?

I mean, I assume there's always opportunity.

But do you think there's any big opportunities to maybe apply some of the global learnings of Domino's even more to local markets, when they have the little issues that appear?

Yes, I think there are.

I mean -- and it is part of why -- if you look at our point-of-sale system that is now in the majority of our international stores, that means we've got better access to data not only for us but for them because we're making sure that the data is being cleaned properly and that it's going to help them make good decisions.

And we still have a relatively small number of our -- or small percentage of our stores on our online ordering platform outside of the U.S. It's currently, what, 1,700 -- 1,300 stores outside of the U.S. on that platform, so that helps.

When we can do that, it gives us a little bit more visibility into it.

I guess that kind of leads towards a bit more of your shared services comment, but it is why we think that's important and why you continue to see more and more markets getting onto our platform.

Your next question comes from the line of Alton Stump with Longbow Research.

Just a quick question.

I think most of what I was going to ask has been asked already.

But just from a competitive standpoint, either in the fourth quarter or how -- what you're seeing today in the first quarter, (inaudible) has been a lot of (inaudible) news out there as it pertains to Pizza Hut being more aggressive, maybe some smaller players responding to that.

Did you see any impact from them in the fourth quarter and/or to date here in the first quarter?

No.

I mean, their retail sales were negative in the U.S. in the fourth quarter and over the course of the year.

And ultimately, from a competitive standpoint, it's going to be all about retail sales.

So no, we really didn't see any difference.

Okay.

And then one quick follow-up.

Just on the commodity front, being up 2% to 4%, with where cheese is at right now, is there any downside potential to that range as you kind of look out over the rest of the year, Jeff?

Yes.

It's -- again, 2% to 4% all in is what we're currently estimating for what the stores will experience.

We can over or underperform that based on what happens in the marketplace.

For different food items up and down the list, we're able to enter in, at times, into certain price agreements to lock up some of the volume at certain prices.

Actually, we can't tell you what we have and haven't done for 2018.

But listen, I don't know where cheese is going.

I don't think anyone knows where cheese is going.

I think the important part for us is we've shown a real good discipline with the U.S. franchisees around sticking on message and executing at a high level regardless of what happens with food cost, regardless of what happens with labor rates.

They're just doggedly determined to continue to build share the hard way.

And so kind of regardless of where commodities may or may not go, I think our guys have the right attitude out in the field, and that's what matters the most.

Your next question comes from the line of Brett Levy with Deutsche Bank.

If you think about some of the things we've been hearing out in the marketplace from the international players on fortressing in the splits, there seem to be some concerns about what it might mean.

And I know you are very focused on growing the global sales.

So when do you think, in the U.S., we can start to see more of a material impact on the retail sales growth?

And how should we be thinking about it in terms of returns at the existing units, what it means on the new units and, really, what kind of impact this fortressing could have in terms of a drag on comps?

How should be thinking about it, really, from a timing standpoint?

Well, I'd say if the return on investment for franchisees is as good as it has ever been, which is ultimately what's generating the energy around the store growth that we've seen.

When we look at the guidance that we've given to the market of 8% to 12% on retail sales, we think the best way to do that is with a balance between comps and store growth.

You've seen very good balance from international for a number of years.

And I will tell you that if you express that there are concerns around that from international.

They're not coming from our master franchisees.

There may be people in the market who are talking about it, but the returns for the franchisees are very, very strong, which is why they're continuing to generate strong store growth.

In terms of the effect on the business, we were over 200 net on growth for the U.S. this year, which means you're looking at something now approaching 4% growth in the store count.

And so there already is some effect in there on our domestic comps.

But all of that is already taken into consideration when we reiterated our guidance of 3% to 6% comps for both domestic and international at our Investor Day in January.

Your next question comes from the line of Chris O'Cull with Stifel.

Patrick, you mentioned sales trends have been more volatile in the past few months, and I apologize if I missed this.

But did you say what you thought was causing the volatility?

I was referencing international.

And so international, over the course of 2017, was a little bit more volatile than it had been, and it was really from some specific markets.

Okay.

I apologize.

I thought you meant domestic.

And then, Jeff, any color on what the company did differently in the quarter to increase the ticket?

Yes.

Again, I mean, the primary one was we sold more food per order.

A little bit of that was probably due or was due to the Bread Twists launch.

We were on TV early in the quarter on that.

There's always some coupon mix that goes on in quarter 4. That happened to help us a little bit on ticket, but it's mostly those 2 things.

Okay.

And then just lastly, did the company pay annual cash bonuses at a target level or above in '17?

Or how did it compare year-over-year with '16?

So it was above our 100% target level, but below the percentage that we earned in 2016.

Your next question comes from the line of Stephen Anderson with Maxim Group.

Quick question on comps.

I just want to ask, with regard to cannibalization, can you quantify how much you might have seen an impact on both international and domestic comps, keeping in mind, though, that this part of your longer-term strategy to build stores within existing markets?

Yes, Stephen, great question.

We're not going to disclose how much of the comp gets eaten by splits.

And again, we would just point you to the 3% to 6% range for global comps and the 8% to 12% on retail sales.

Is there an impact?

Yes, there is.

But again, we think that really distracts from the more important question, which is how do you profitably grow retail sales in total?

And obviously, again, being led by international with -- and above range, again, when you strip out FX, above that 12% range for that business.

It's more about the all-in retail sales than it is about how much impact is -- do splits have here or there.

Your next question comes from the line of Jeffrey Bernstein with Barclays.

Two questions.

One, Patrick, I know just on the U.S. comp, it's been discussed, and I know you said you feel good about the trends and you're leading the industry.

I know it was talked about that the comp trend did slow on a 1 and 2-year basis.

I'm just wondering if you don't think it's anything, perhaps, internal.

And I think you mentioned carryout and delivery were both doing great, and digital seems to be doing well.

Wondering if there's anything you're seeing in terms of what would attribute to that.

Or perhaps maybe the industry slowed down a little bit?

I don't know how -- with what regularity you get that industry data.

But I know in the past, you talked about the industry growing maybe 1% to 2%.

Maybe you're seeing some sort of a modest industry slowdown that would attribute to the more recent easing of the U.S. comp.

And then I had one follow-up.

Yes.

Jeff, so first of all, I guess I'd reiterate.

We're rolling over a 12.2% from the previous year.

We had a 0.5-point shift out of the fourth quarter into the first quarter of this year.

We feel very, very good about the overall.

And in terms of the industry, we're not seeing anything that is showing, really, acceleration or deceleration materially over the ongoing trend.

Got it.

And Jeff, can you just remind us, because you have revenue streams from the franchisees and the company and in the supply chain, an incremental point of comp on annual basis, ballpark?

What's that worth to annual EPS both for, I guess, U.S. and international or combined?

Yes.

We know that math.

We don't give that math out.

But 1 point of comp, particularly if it's from orders, is very good for us.

Good to know.

And just lastly...

We can't do all of your work, Jeff.

No, no, but I'll put that in our model.

So it's a really good...

For what it's worth, we had the same reaction here to his answer.

Yes.

And then just lastly, the cash return -- I mean, I know you talk about balancing share repo and dividend, and more recently, it's been more about the repo.

The dividend, right now, I know would be the healthy increase you just made, it's still roughly a 1% yield, which is kind of the low end of peers.

I'm just wondering why wouldn't you maybe be more in line with peers in a 2%-plus type range.

And obviously, you have the strong free cash flow and still have the flexibility to kind of do as you will in terms of the repo.

Is there something that kind of keeps you more cautious in terms of upping that dividend even further?

Yes.

It's Jeff again.

We returned $84 million in -- to shareholders in the form of our ordinary dividend.

Board just increased another 20%, which was on a 20-plus percent from the years before.

And so while dividend yield is one metric we obviously track, and we care somewhat about, we're also very interested in what the dividend payout ratio is and some other things.

And what I would tell you is, at the end of the day, it is a healthy dividend.

We don't get to control the stock price directly, so it always has a chance to bounce around.

But a $0.55 a quarter dividend in 2018, we believe, is a healthy return to shareholders in that form.

The one thing I'd add is you know we've always talked about the fact that we're agnostic on how we use our cash.

But if you look backward, our return on investment for our shareholders on our decisions to buy shares has been extraordinarily strong.

And so there is a balance in how we're approaching it.

We're continuing to move the dividend up with the latest announced increase, but we've generated pretty darn good returns with the buybacks.

Your next question comes from the line of Sara Senatore with Bernstein.

One question and then one follow-up on technology spend.

In the past, I know you've said you're going to invest first company, and we'll continue to see you invest and grow G&A.

But I think sometimes, we've seen companies prioritize investing, and then top line has sort of decelerated, and they need to find ways to maybe balance that.

So I guess to the extent that maybe your comps start to fall globally more in line with that 3% to 6% range, rather than above, is there any way for us to think about that investment side, the growth OpEx, if you will, and how that might vary with top line?

And then, like I said, I do have a follow-up, please.

Yes.

I'd go back to repeating what we've said at Investor Day and, I think, earlier today, which is the investments that we're making, both on the G&A front and capital investments, are what is going to continue to drive our projection of 8% to 12% global retail sales growth.

And we feel good about how we've performed against that previously, and we're going to continue to invest to do it.

But we don't start from a projection of sales and then work backwards to how much we can afford to spend.

We look at the investment opportunities that are in front of them -- in front of us, what we think the odds are of those investments generating return for our shareholders.

And as long as that expected return is strong, we're going to continue to invest.

Okay.

That makes sense.

And then the follow-up is -- you talked about, with respect to technology and delivery, needing to do it in-house if it's going to be competitive advantage.

One thing I was curious about is, do you think it is possible for a company to acquire kind of technology and delivery expertise sort of in one fell swoop?

Or is that something that has to be grown organically in an organization over time?

I guess is there any way to kind of leapfrog through a big acquisition of talent and technology?

Well, look, if you look broadly, I mean, people have acquired competitive advantage or built it themselves.

That's always a choice you have.

But I think, ultimately, if you're using a third party that is available to anybody in the market, by definition, that's a commodity, if anybody can access it.

So could you see somebody acquire that and build competitive advantage through that acquisition?

I suppose, if they restricted everybody else's access to that technology after they made that acquisition.

But if it continues to be available to everybody, then almost by definition, it's a commodity, it's something available to everyone.

So only if you acquired it and then got everybody else off of that technology would there be an opportunity to really start to turn that into a competitive advantage.

Your next question comes from the line of Matt DiFrisco with Guggenheim Securities.

A lot of questions about delivery and all these new entrants and third-party aggregators and everything.

I'm just curious, behind the 3% to 6% domestic, 3 to 5-year same-store sales guidance, what is embedded in there?

Or what's your outlook for the delivery growth category for overall of food?

If you could just remind us.

And then I have a follow-up.

I don't know that we've got a specific assumption around how that's going to grow.

What you have seen so far is that people have talked about this being incremental to their business.

There has been no incremental growth of the restaurant category, so I, frankly, would take issue with the idea that this is incremental within the overall industry.

What I think you have seen is some people's take-away business or on-premise business to date shift to delivery.

So as long as all that's happening is it's shifting from one restaurant chain from a carryout transaction to a delivery transaction, for our purposes in projecting our business, I don't know that it really makes any difference.

Overall, I guess I would give the same answer you've heard from me many times, which is we just have not seen a really significant effect from this.

And if we can identify it, it is still relatively small, but it's had an impact on our business.

Well, I guess what I'm trying to get to is if the category is driving -- if demand is increasing for delivery, then should we see your traffic as, well, being -- seeing it go a little bit more positive?

But it seems like it, perhaps, has been a little bit of a deceleration.

Yes, I -- if you talk about demand growing for delivery, what you've seen so far is more supply of delivery.

So you've seen some restaurant chains that didn't previously offer delivery, now offering it.

And it has shifted some relatively, to date, relatively small percentage of their customers from being a carryout customer to being a delivery customer.

But if that's how they're sourcing volume, then it doesn't really affect our business.

Okay.

And then just a last question, bookkeeping.

You mentioned a little bit about the facility coming on domestically.

Is there any inefficiencies that we should see or sort of factor into our first half of '18, in the margin assumptions, until that facility is fully efficient?

Or is it going -- is capacity going to be met pretty quickly and it'll be up and running and not a drag on margins?

So we're not giving guidance specifically around supply chain margins, short or long term.

But what I can tell you is when we open up the facility outside of New York, there will be a lot of cost, but also some transportation savings that we're able to capture there.

On a net basis, over the medium term, I don't expect the supply chain margins to dramatically be volatile, whether it be in Q4 or the first half of next year.

But again, we're not giving specific guidance around it.

But again, I think -- it's a big, big business.

It's a $2 billion revenue business.

Bringing on a very large center in the Northeast is a big deal, but it's not something that I think is going to cause seismic shifts in margins.

What was the date for opening?

We're going to open it up in Q3 is the target.

And gentlemen, your final question comes from the line of Jon Tower with Wells Fargo.

Just quick ones for me.

First, you have some paper or notes that are callable in April.

I think it's $493 million at a 3.48% rate.

I'm curious to know, if you would go to market today, how that rate would look, one.

And then, two, I know you don't have a formal targeted leverage ratio.

But given U.S. tax reform, I'd be curious to hear your thoughts on leverage ratios today versus what you were thinking about in the past.

Yes, I'll take the last one first, which is tax reform.

Obviously, we're a big winner on that, and that helps us in everything.

First and foremost, it just gives us that much more confidence to go faster on investing in all the things that are going to grow the retail sales.

But it also is likely that some of that will fall to the bottom, and we will adjudicate that, as we do all free cash flow decisions, whether it be a buyback or a dividend, et cetera.

On the leverage itself, we've generally said 3 to 6 turns of EBITDA.

The result of tax reform means that we can do a little bit more than that comfortably.

Although, at the same time, we're not ready to say that we're going to move the top range target up because the cost of equity is a funny thing.

Our shareholders need to be comfortable, and we know it took us about a decade to train you all that 6 turns of leverage was good for our business model.

And so we're not ready yet to say that we're going to go any higher than that.

As far as the specific piece of debt we have from the 2015 deal, which is part callable in a couple of months, again, nothing to announce on that.

We're always looking at what the market is doing and what the rates are.

We've seen a flattening, as you know, of the yield curve.

The longer-term stuff looks a little bit more attractive than maybe the shorter-term stuff.

But again, that bounces around quite significantly, and really, nothing to announce on that.

This concludes our question-and-answer session.

I will now turn the call back over to Patrick for closing remarks.

Thank you, everyone.

We appreciate you joining the call today, and we look forward to discussing first quarter 2018 results on Thursday, April 26.

This concludes today's conference call.

You may now disconnect.