Papa John's International Inc (PZZA) 2009 Q4 法說會逐字稿

Good morning. I am Jamal and I will be your conference operator today. At this time, I would like to welcome everyone to the Papa John's fourth quarter earnings conference call. All lines are placed on mute to prevent develop any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator Instructions).

Mr. Flanery, You may begin your conference.

Thank you, Jamal.

Good morning. With me are our Founder, Chairman, and CEO, John Schnatter; President and Chief Operating Officer, Jude Thompson; President Global Operations, Bill Mitchell; Senior VP of PJ Food Service Tony Thompson; Chief Marketing Officer, Andrew Varga; and other members of our executive management team. After a brief financial update, John and Jude will have comments about the business and the management team will be available for Q&A. Our discussion today will contain forward-looking statements that involve risks and uncertainties relating to future events. Actual events may differ materially from the projections discussed today. Certain factors that can cause actual results to differ are outlined in our earnings release and in forms 10Q and 10K. The call is being taped and the replay will be available for a limited time on our website and in downloadable podcast format.

We were pleased with our fourth quarter and full year results and what was a very challenging consumer environment, especially as the QSR pizza segment continued to face negative sales and traffic pressures. Our financial results were strong for the quarter in full year given that, as planned, we focused on investing in our domestic system and building market share both at the individual unit level and on a unit count basis. We reported pro forma earnings per share of $0.41 for the quarter versus $0.48 in the comparable quarter last year and $1.50 for full year 2009 versus $1.68 for the prior year. Revenues were relatively flat for the quarter and decreased 2.3% for the year as compared to the same prior year period. The full year decrease was primarily due to the impact of lower commodity costs on the revenues of our commissary business unit.

As a reminder due to a change in accounting rules beginning in 2010, we will no longer be required to consolidate the results of certain franchise restaurant that were consolidated as variable interest entities in 2009. This change will have no impact on consolidated operating income, but will negatively impact 2010 consolidated revenues by approximately 3% to 4%. On a business segment basis, Company-owned restaurants had one of their most profitable years ever in 2009. Operating income, excluding impairment and disposition losses was relatively flat for the quarter and increased $9 million for the full year as compared to the same prior year period. The improvement in 2009 was driven by lower commodity costs and the sale in late 2008 of 62 restaurants that is were collectively unprofitable, while maintaining solid top line sales results with a comparable sales decrease of only 0.5% in a difficult sales environment for the category.

Cheese cost increases, a comparable sales decrease of 1.4% and the lapping the restaurant sale slowed the year-over-year improvement in Q4. The cheese cost increases also slowed the rate of repayment of the BIBP deficit in Q4; however, the year-end deficit of $20 million still represented a $22 million reduction from the prior year-end level. Based on current futures market projections, we expect an approximate $5 million to $7 million reduction in the deficit during 2010. Operating income for our domestic commissary business segment decreased $1.3 million for the quarter and $800,000 for the year as compared to the same prior year periods. The full year decrease was due primarily to certain management transition and commissary relocation costs. The commissary provided increasing levels of pricing reductions throughout the year, the impact of which was offset on a full year basis by lower fuel costs.

Domestic franchising operating income decreased approximately $600,000 for the quarter and $100,000 for the full year as compared to the same prior year periods. The fourth quarter increase was primarily due to the September quarter point increase in royalty rate. On a full year basis, the impact the royalty rate increase was offset by reduced franchise and development fees from fewer net unit openings and $500,000 of franchise renewal fees collected in 2008. Excluding prior year impairment, operating results for our international segment were relatively flat for the quarter and improved by $1.8 million for the full year as compared to the same prior year periods. The full year improvement was driven by growth in unit count and unit sales volumes offset for the quarter by charges related to the development of the new commissary facility in the UK and the closure of a Company-owned restaurant in China. Operating income for the all others business segment declined $1.8 million for the quarter and $6.5 million for the full year as compared to the same prior year periods. The decreases were primarily due to a reduction in the online fee percentage, as previously agreed with our franchise system and declining sales and profitability in our printing and promotional items business due to the challenging economic climate.

Unallocated corporate expenses increased $1.8 million for the quarter and $13.6 million for the full year as compared to the same prior year periods. The increase for the quarter was due to an increase in short and long term incentive compensation as a result of both improved 2009 performance relative to targets and the fact that the prior year included the forfeiture of awards related to certain management resignations partially offset by a decrease in the provisions for uncollectible notes and accounts receivable in the current year period. The full year increase consisted primarily of the above noted increase in incentive compensation and the substantially higher level of franchise marketing support provided in 2009. We repurchased $23.5 million of stock in the quarter and $28.5 million for the full year. Subsequent to year-end, we have repurchased $1.5 million of stock to date and have approximately $32 million of remaining repurchase reauthorization through year-end.

Our free cash flow, a non-GAAP measure we define as cash flow from operations excluding BIBP, less capital expenditures, was $44.8 million for 2009 as compared to $54.3 million for 2008. The 2009 results represented a free cash flow yield of 6.9% based upon 27.9 million average diluted shares outstanding and yesterday's $23.20 market closing price. Based upon the solid start we have seen in the first two months of 2010, we are reaffirming our domestic system-wide comparable sales guidance range of negative 1% to positive 1% and our earnings per diluted share guidance range of $1.70 to $1.90, excluding the impact of BIBP.

Now, I would like to turn the call over to our Founder, Chairman, and CEO, John Schnatter.

Hey, Dave, thanks.

I want to start out first by congratulating our franchisees and our corporate operators on a very solid fourth quarter and a tremendous performance during 2009. The investments that we made in our system over the last 15 months supported by a favorable commodities environment has helped drive positive transaction momentum in some of the most profitable unit economics in the history of our Company. During 2009 our operators delivered what we believe to have been the industrial leading results among the national pizza chains in a very challenging consumer environment. This performance reinforces our fundamental belief that offering a superior quality product at a compelling value will win in the market place over the long term.

During the first eight weeks of 2010, we have seen what we believe to be unprecedented and very heavy media spinning in the pizza category. This is good. This has finally turned the category positive and the category's been negative for 10 years. Experience in history shows that we all benefit from a heathy category; and our system is holding its own in this intensely competitive environment with positive transaction momentum continuing in the first quarter, and we again want to reaffirm guidance for 2010.

Now, when I started Papa John's 25 years ago, we did so on the fundamental belief that better ingredients really does make a better pizza. After 25 years, that commitment to superior quality hasn't changed one bit from our fresh tossed dough from fresh water to our 100%, all-natural sauce made not from concentrate, our cheese, 100% mozzarella, we put plenty on it, real meat toppings and the fresh veggies that we cut in our restaurants every day. Better ingredients. Better pizza. It's more than just an advertising slogan. It is a way of life at Papa John's. This commitment to quality has stood the test of time through peaks and valleys over the last 25 years and moving forward, we expect it will continue to serve us and our shareholders well over the long term.

With that, I will turn it over to the President and Chief Operating Officer, Jude Thompson, for his remarks. Jude?

Thank you, John.

I would also like to congratulate our system on a tremendous quarter and year. Our plan to capture market share in 2009 by driving unit economics and helping our franchisees open new units has worked. Let me start by commenting on our US development efforts. The incentive program we put in place for 2009 has served us well, allowing us to grow more than 200 deals in the domestic pipeline by the end of 2009. For 2010, we have also launched a very compelling domestic development incentive program to keep this momentum going. The early response to this program has been good, and we think it will help us achieve our plan of 40 to 60 net domestic openings for 2010.

Our international business also continues to show momentum in the face of very tough worldwide economic conditions. In 2009, this included 100 net international openings, a 17% increase and a $1.8 million improvement in year-over-year operating results. For 2010, we expect international system-wide sales to grow in the range of 15% to 20% producing 100 to 120 new net international openings. As John mentioned, the category has turned healthy since the beginning of the year, and positive transaction momentum that we experienced in 2009 has continued in through the first quarter of 2010. Our product quality and service scores are strong and we like the quality position we have in this category. I am pleased with the team we have built, and the spirit of collaboration with our franchisees is very strong. We have a good marketing plan laid out for 2010. Combine these attributes with our passion for better ingredients, better pizza, we will continue to build on the momentum we enjoyed in 2009 throughout 2010.

And with that, I'll turn it back to David for questions.

Jamal, if you'll now open it up for questions?

Thank you. (Operator Instructions). The first question is from Brad Ludington from KeyBanc Capital.

Good morning.

Good morning, Brad.

I wanted to ask, looking first at John and Jude's comments that positive transaction momentum has continued into the first quarter. Given some of the price points, should we still expect a negative mix and a strain on same-store sales?

This is John. The first three weeks were a little bit tough. The following four weeks were good and balanced itself out. We went out at the beginning of the year, two pizza were $17, which was $8.50 a pizza, so the 10-dollar price point is actually a very good thing for us.

Our budgeted for year cheese prediction was $1.60. The cheese is less than that. And Brad, when cheese is lower than budgeted, it is an easy business. When cheese gets over $2 a pound, it's a difficult business. We have been doing this for 25 years. We have seen these kind of things over and over again. Probably haven't seen both the two big guys do it all at the same time, but frankly we weathered the storm and our business is healthy.

Okay.

Brad, this is Jude, just to make a comment. When we talk about positive transaction that we enjoyed in 2009, that is a correct statement and the momentum on the transactions continue to build. We see that at the beginning of this year, as well.

Okay, thank you. Then, when you talk about the positive marketing plan -- when we are looking at marketing runs and marketing spend, should we expect additional marketing cost here in the first quarter when compared to first quarter '09 and the rest of the year? Does it match up pretty close?

This is Andrew. You should expect to see a little bit of an increase in marketing spend, primarily to support our Superbowl and NFL partnership which was the first time we had engaged in the partnership. So, traditionally, we haven't been as much -- have as much spend during that time, so, yes, you should expect to see a little more spend because of that.

Brad, the only thing you will remind you of, most of the national spend does come out of our national marketing fund, which is separate from our financial statements. So you might, the timing of what Andrew is talking about, won't necessarily be all reflected in our financials during the same time frame. The national marketing fund allows you to spread it over the year.

Okay. Then, you know, what level of loss from the international division are you projecting for 2010?

What we said in our guidance is that it will be, I think we used the word, slightly worse than the $3 million loss we had in 2009. And we are probably not inclined to get a lot more specific than that.

Okay. Fair enough. That covers it for me right now. I will bet back into queue if I need.

Thanks, Brad.

Next question comes from Mark Smith from Sidoti & Company.

Hi, guys. Just a handful of quick questions. To follow up on international, are you seeing still any changes? From the last conference we received some difficulties in international. Have you seen anything that has gotten worse or gotten better?

Hey, Mark, this is Bill. In respect to Jude's comments, of course, we have certain challenges with the economic slow down, but overall we are very pleased with our position and the future opportunities we have for both the Company and franchise units.

So, again as we just reaffirmed our store growth for 2010, we continue to be encouraged and we are also pleased to be in the number two pizza space in China. And we have a very solid franchisee there, and we are very encouraged on our position, and as that economy rebounds, we're taking a very, very strong position.

Looking domestically, John, you talked about the big media spend here in Q1. Are you viewing that as a rising tide that is lifting everybody's boats or at the same time are you seeing some improvement in the consumers, ex the extra marketing spend?

Well, if you put in the context of the last full years, we have gained market share every year for full years in a category that's been negative. That is very difficult to do. The other two players, I don't think have been quite as fortunate, so we felt late last year they were going to do something. We didn't know they'd both do it at the same time. And we knew they were going to do something

The good thing about what they have done is the category's gone from a negative five or six to a positive five or six. And so, if we have a category that is healthy, we are going to get our share of the market. This is good for everybody. I don't think it is coming out of pizza. I think it's coming out of other NPDs; if you look at the 45 companies that we track every week, for example, last week, three of the six pizza chains, or eight pizza chains, half of them were positive and then 80% of the NPD categories were negative. So we finally -- they spend enough money where they made the category healthy and this is a very good thing and our number are good.

Can you guys quantify at all any of the impact in the Christmas shift. I believe it was a Thursday to a Friday.

We took a look at that. I honestly think it is fairly minimal. Andrew, any?

I don't think it was that big of an impact. We looked at it before. I can't give you the exact numbers, but it was small.

My recollection is that it is less than 1% for the quarter.

It was definitely less than 1%.

Last question here. Looking at your use of cash and debt repayments in 2010. Any insight you can give us on that, especially with your line expiring early next year?

I will start. We are fairly conservative by nature. I think we have $30 plus million of remaining share repurchase and our guidance has assumed we will use the free cash flow and execute against the repurchase and that being said paying down debt is a good use the cash flow and really good position for us to be in.

In this business, if you owe a bunch of money it changes your mind set. We have some franchisees that have it paid for and they operate differently than franchisees that are leveraged up. In this environment, we like cash. We have been conservative and if gives us a luxury that if we need to do something, whether it's build a commissary, improve our product quality, or hire good people, we don't hesitate to pull the trigger because we have the mind set of being a long term Company and we can play the game that way. With that being said, we know we have to hit our quarters, and we had a good Q4 of '09 and great year in '09 and we are having a good Q1 of '010.

Thank you.

Thanks, Mark.

Next question comes from Steve West from Stifel Nicolaus.

Good morning. John, I'd like to get your out look or your view on the pizza category. Last year there were a lot of promotions with the $4 and $5 discounting with Pizza Hut and Domino's, You guys didn't really play in that. This year we are seeing the discounting, although it is a higher price point and you are in the mix of that. Do you see the promotional level and the environment getting more rational and how do you see this playing out? As a consumer, do you see the consumer trends improving or more like a one time blip here?

Our product and our brand position is the envy of the category. It just is. And it is the envy of the industry. And it is something we protect, day in and day out. When you have a better product and better system, you can afford to be a little bit higher. With that being said, you can't be out of the price range of value. To your point, we did not have to play the $5 pizza game.

You can't make a good pizza for $5. You just can't make a silk purse out of sow's ear. Cost us more to make a pizza. We put more on it and we think at the end of the day that resonates value with the consumer and we measure this thing four or five ways from internally to the fran-trackers, the MBD to crest. And you know, we had nice consistent scores.

That's the one thing that is different about Papa John's and other companies. If you look at their graph, it looks like a heart rate. It is up and down every month. And Papa John's is a nice even consistent improvement. We think incongruity breeds mistrust and we thin consistency is the key to quality. We are very consistent. We wake up everyday, and we get with it, and we are on top of it, and we try to make great pizza and give great service, and take care of our customers and take care of our employees. It's not any harder than that.

Okay. That's fine. So you think this is a better environment than what you would see last year which you classified that way/ Things improving?

This an Andrew, I will take that. I think absolutely. You have a lot of players in the category coming out with lots of promotional activity and lots of advertising, as John and Jude touched on it, it certainly helps all of us and makes for a more exciting environment, truth be told. It's more fun.

The consumers see more activity around pizza and John has talked about it, we are proud of the quality and gives us the ability to be out in the mix and telling our story a little bit harder.

Dave, if you can touch on, you mentioned you were budgeting $1.60 a pound for cheese and it is much lower than that right now and has been for the whole year. And if you are doing the $10 discounts for the pizza, obviously there's some margin hit there versus what you would have been selling them for last year.

Are you comfortable with the margins you're getting now with the cheese being lower? And what is the expectation for cheese as we go forward? And can you maintain this environment?

Steve, I will start out. First of all, yes, cheese early in the year is a little lower. It is still expected to ramp up later in the year. So, I think there is a little upside there, which allows us to protect margins in a little more competitive environment. Yes, we are pretty pleased with our margins.

The three things we look at for success, Steve -- this is John -- a passion for the business. We have that, and this culture reeks with that. Best in the class; which -- every single measurement, we are best in class. And you have to have unit economics that work, an economic engine that produces income. You do that by running high sales and low FLM. The unit economics for February for Papa John's may have been the best; it is definitely going to be one the top best four-week periods in the history of the Company.

Thanks very much. I appreciate that.

Your next question comes from Chris O'Cull with SunTrust.

This is a question on the most recent promotion. Is the $10 large promotion, pie promotion, is it possible because of lower cheese or is that really engineered to limit the gross margin issues? Should we expect a promotion to be removed if the cheese goes higher?

This is Andrew. I will take that; I don't think so at all. Pricing for us is dependent on so many things; obviously the competition is one of those. But we also are considering the type of the pizza that we are offering, the size the pizza and the theme of the promotion and other add ons that could be important. As an example, for the super bowl, we not only had the $10 we had a theme promotion, the Super XL IV that was the extra large, four topping pizza that did well in that environment. We look at a number of different thing it is when we talk about pricing.

It sound like super bowl promotion and super bowl week, sound like that new, the marketing effort really paid off for itself. Is that a fair characterization? Sounds like that was one of your better weeks.

We are not at liberty to talk about for competitive reasons. But it will be something that we will dive into it a little bit more.

This is a question regarding international. I know the Company's been evaluating strategies for brand awareness in China. What would be the impetus to change your approach to China? At what point do you make a decision to change that approach, I guess.

Hey, Chris, this is Bill. As we see the business today, and as I mentioned earlier, excuse me, we like our position there. And like the card that we have played. We don't see anything in the future that says we need to change the approach and seeing the economy as we all read and heard, a rebound in China. We are taking our lion's share of that

We are very pleased with our equity stake in Beijing and how the company are performing, so we don't see anything in the near future that would take us in a different path.

Okay.Fair enough. G&A improved dramatically in the fourth relative to the third. Is the G&A level in the fourth a good proxy for quarterly G&A this year?

It is probably a little lower. We are certainly focused on G&A. And it has improved. We talked about the reduction in force we had in September representing about $2.5 million to $3 million of full year impact, so certainly part of that started coming through in Q4. And that being said, you have year end true ups; we did have a couple of accruals that got reduced a little bit in Q4, so it might be a tad low as a proxy, but it is not way out of line.

Okay. Great, thanks, guys.

(Operator Instructions). Your next question comes from Michael Wolleben from Sidoti and Company.

Good morning, guys.

Hey, Michael.

I wanted to clarify one thing. The category as a whole switched to a positive five or six. When did the switch occur or and is it directly to this increased advertising out there?

I will touch that and let Andrew if he wants to elaborate. It was unbelievable. We were sitting on a negative five for almost all of '09, even December. Then it was like a light switch. It went from negative five to positive five in one week and stayed from the 5% to 9% range the whole year. It was like a light switch went on.

Something I had never seen before and never seen the category switch that quick in the 25 years I have been doing this. Also, I have never seen where the pizza category could take the rest of NPD backwards. We are taking so much share out of the other NPD restaurants that 50% of those restaurants out there are running a negative eight plus, last week, so that is unprecedented. Andrew?

The only thing I would add is there was so much new news that came out at the beginning of January and you combine that with media from the three biggest players and that created a lot of excitement for the category, the likes that haven't been seen in quite some time.

How sustainable do you think that that excitement, that news flow is?

Well, we tend to focus on our own excitement, and it is fairly long lived A lot -- I always go back to strategy and the longer you are executing the strategy, the better and more long lived your ability to grow is going to be. We are in our 26th year of executing our strategy and we feel good about where it is going to take us.

One of our mentors and a gentleman I really admire, is Truet Cathey, with Chick-Fil-A. I flew down full years ago to visit with Truet and I said, you run positive comps now for 48 out of 50 years. How do you do that? He said John, if you wake up and take care of business, you ought to be able to beat last year.

There is so much truth to that. If we wake up and do what we are supposed to be doing and tend to the shop and mind our business, and take care of business, then good things seem to happen no matter what the category does.

With that being said, it is an exciting category right now, because you don't know what the next guy is going to do and that makes it interesting because it keeps you on your toes.

With that being said, the positive momentum here in 2010. Any thoughts -- I know you have rolled back a good chunk to the franchisee support you gave in 2009 -- any thoughts on further reducing that franchisee support as we move through 2010?

Michael, I will start on that. It is pretty early in the year, obviously. And we know that the direction we are going is to reduce franchise support. There is a reason we haven't been too specific on how much the amount of reduction is going to be. At this point we leave it at that level of not too specific.

This is Jude.

I will comment, that throughout all of '09 we talked about, I believe every quarter call with everyone, that the health of this system is important. Store openings is important. So, as a franchisor we look, as John mentioned, at FLM and cheese prices.

We got a break on commodities and the health of our system and the runway that we have to develop more and more stores -- I gave you a number that we were able to produce over 200 new opportunities in our pipeline, we have more runway than that. I still like to say we are 26 years young; we got opportunities, we've got wonderful markets out there that have development, opportunities for existing franchisee and currently about 80% of all new store openings comes from tour existing franchisee. We need to make sure they stay good and healthy.

And as John said, if it wasn't one, two, or three, most profitable years in the franchisee history, it is somewhere in the range, and we have had a very good start with that for this year and that means they will have money it invest. It is still tough to get loans out there from banks and they have to do it from the free cash flow. It all hangs together, Michael. And when we look at it, I don't know if, when you say assistance, I call it an investment. Our shareholders, we believe they will get their return.

Okay. Then one last thing here. As we look at the international side of things, it looks like profitability is still looking forward if you ex out that commissary investment. Any thoughts on releasing comps on what that side of the business is doing?

We would have been disappointed if you didn't ask, Michael. While we are still in as many new markets as we are, where we are experiencing the grand opening effect, we will probably still wait awhile on that. But we will try to give you a feel for what the overall system growth is so you can get a feel for the trend of the average unit volumes. It is just right now as we go into multiple new markets, you are going to have a minus 25% comp year two because you get such a grand opening effect. We will wait a little bit longer on that but we'll try to give you enough information to get the general trend.

All right. Great. Thanks, guys.

Thank you.

Your next question comes from Jonathan Waite with Precipio Research

Hey, I am wondering on the $10 price point, what are your plans there? Is this a permanent price point for the pizza category?

This is Andrew. I will take it. As I said earlier, we look at pricing through so many different lenses and, obviously, in this particular time period, it is a very effective, easy-to-understand pricing lever that makes sense, in particular for the consumer. So, obviously right now, it makes a lot of sense, but there are so many ways that we look at price, particularly as it relates to being the quality leader.

We look at it from the perspective of new news through new pizzas and innovative ideas we think can bring to the market place that we think would command a higher price is one good example to throw out there. Time will tell. We don't believe it is the price for us. I will say that. And we certainly will, as I said keep looking at pricing all the time and look at it with different lenses based on different opportunities we have.

Jonathan, this is Jude.

Back to a point John made, it may have been subtle, but our January offer was $16.99 for two pizzas. That is not $10 pizza. Two pizzas would be 20. If we can have positive transactions and we can have momentum in this business and have the breaks that we are all enjoying with commodities, a $10 price point, I would caution that that is a bad price point. We tend to brand it.

Our first intent fit naturally with the Superbowl offer and everything. Pricing for us, we will look at it from period to period, and we will see what we have to do with it. We are pretty excited and happy with what we are doing right now.

Jonathan, this is John. More importantly, the franchisees are happy. When cheese is low and sales are up, they tend to be happy. Cheese is high and sales are down, they tend to be unhappy. With that being said, Jude and the team have built a collaborative alliance with our franchise system to the likes I have never seen. When there is an issue, the franchisee work with us. There is no going dark. There is no under cutting. There is no sucker punching.

We have a collaborative alliance with our system and our system trusts us, and we value that trust. We don't want to do anything to betray the trust. We're in a situation right now where FLM is low, so they are happy. We're having our OpCom next week and we had over 1,000 people signed up. We are going to have a good meeting. The system has a lot of momentum. They are making money and they're are going to reinvest. And we're going to get this thing to store 4,000.

Then talk about the market share picture here. It sounds like the big pizza chains are taking share from others. Who would you say that is? I've heard from others in the space you are taking it from the take and bake, the warehouse, the COSTCO's of the world? Who do you see you guys taking market share from

This is Jude.

It is impossible to know exactly. With that said, when John said the NPD in the QSR segment, we track this weekly. We look at it. And what John was referring to as the pizza category has gone positive.

You will see other QSR categories not having a positive time that where they may have had that last year. So a lot of media weight and a lot of excitement about pizza at the beginning of the year, it may have taken -- and again, I say, may, because you never know. And they don't give us the names of restaurant chains that you just have an idea of the line of business they are in; it could come from everywhere. I am not sure if it is independent pizzas or if it's -- like I said, sit down, dine in, sandwich, you never know. But, it looks as if it is pretty evenly spread.

Then, finally, just coming back to the $10 price point. It sound like -- ddn't you say that January started off a little rough and then you began to see some really good traction in February. Doesn't that coincide with the $10 price point? And doesn't that beg the question, wouldn't this $10 price point be something you want to continue?

Again, we had a good Q4. And we had an outstanding '09 and I can assure you, Jonathan, we will have a good Q1 and we feel very good about it.

The first three or four weeks were probably a little less in expectations and then the next three or four weeks probably a little bit more. That's the nature of the business. And report on a quarterly basis.

This is Jude.

We report on quarters. You know, if you monitored day to day sales. You would drive yourself a little crazy, so we have peaks and valleys like anyone. We had it last year, so I want you to know when you leave this call today, we are pleased where we sit right now.

Okay. Great. Keep up the good work.

Thanks Jonathan.

Next question comes from Mitch Speiser with Buckingham.

My first question is to take a step back, in 2009, it looked like most of -- the pizza category seemed to be better than the overall industry in general. Do you think that the slower economy is a positive for delivery? Can you comment on that view?

Mitch, this is Jude.

You said in 2009 the pizza category -- and John mentioned this several times -- was running negative for really the entire year. There may have been a week or two where it would get above the line and have positive comps, but a s a category as a whole -- and, remember, we are at 10% unemployment which is always a key indicator of what happens in our line of the business. The reason we said we are pleased with fourth quarter and we're pleased with 2009 is we out perform the category. You know, flat comps for a year and positive transactions, momentum, raised guidance three times; but the category itself, meaning the pizza category did not out perform other QSR segments.

Thank you, for the clarification. Secondly, do you think the bad weather and the Olympics now have benefited the pizza category within that uptick you told us about?

Well, this is Andrew. Certainly, when you get big events like the Olympics and the Superbowl, I think that's a help. It is always hard to gauge whether weather is good or bad. As Jude always says, a little bit of snow is great for our business, but a lot of snow and ice is terrible because it shuts down stores.

On balance, the weather probably hurt the pizza category because it was pretty serious snow, particularly in northeast where you are getting a foot and then four or five days later you're getting another foot and they just kept digging out. We had a lot of stores that were closed down, but all in all we managed to bounce back from it. I would say, net net though, it was probably a bit of a detriment.

Is it Mitch or Mc?

It is Mitch.

Sorry about that. We actually had days where we had up to 500 store that couldn't deliver and 300 stores that were closed. With the peripheral of the weather, you may get a little bit more of a bump, when it snows, the phone does ring. I think, to Andrew's point, that was offset by the number of stores that were actually shut down.

Thanks. My last question, just on the frozen pizza category.

Any thoughts on your share gains, if any, last year or this year to put the frozen pizza category into perspective?

This Andrew. I will go ahead and answer that one. That is a tough one to know. because we simply don't have the visibility that we have, obviously in our own share of the category. The one thing that -- I like to look at pizza as a share of stomach business of which you have frozen pizza, you have QSR delivery pizza, you've got independents. Obviously in a tough economy, you could potentially see some trade down that the frozen pizza business enjoyed. As the economy improves, that pendulum will move back into delivery pizza as well as independent pizzerias. It is awfully hard to tell how they are doing. We don't have that similar visibility or least understanding.

Great. Thank you very much.

(Operator Instructions). We have a follow up question from Brad Ludington with KeyBanc Capital.

Just a couple of follow ups. First off, if you look at commissary margins, in the fourth quarter they improved from what we saw in the third quarter, and maybe not back to normal levels, but better than we had projected, personally.

Should we expect similar levels to hold in 2010 or will those come back in? What is the expectation there?

I will start with that. Brad, I think what we have consistently said is don't look for long term margin improvement out of our commissary.

What we want to do is have our commissary profitability go up, because we are selling more stuff, either with that transaction momentum at store level and net unit count growth. If you saw a little bit of shift in fourth quarter that is not something we would strive to have. We want to pass those savings back through to the system and get store growth.

Brad, this is John.

You got to be real careful with the distribution part of the business, because there is an element of a captive audience. I have two reports. Quality and assurance (Q&A) and the commissary. The reason being the commissary has to be legit.; it has to be honorable. And the franchisee are going to hold me accountable to that.

And to David's point. We give them a P&L. We shoot them straight. We feel like they let us make a fair margin. If the FLM gets out of whack. We will use the commissary as a lever.

As I think about our business, we control the product from the fuel to fork. We will use the commissary as a mechanism to keep our system healthy. We have done it in spades over the last 14 months.

Okay. Other commodities -- we talked about cheese and other expectations. What are your expectations for other commodities as a basket? Is it stable, down a little bit, up?

If you look the last eight years, none of the products really move a whole lot. There's a slight increase in pizza sauce, there's a slight increase in meats, but it is not a big increase.

Cheese, though, is pretty radical. The prediction for this year for cheese was $1.60. The one thing you can count on, you know that number is wrong. Whether it is $1.80 or $1.40, I'm not that smart, we would have thought with the increase in the category that mozzarella, the cheese market, the cheddar block would have gone up. That had not been the case, it has actually gone down, which tells us as far as supply and demand that the other MPD users are not using as much cheese. They are negative, which is offsetting the pizza category, but history says cheese averages about $1.45 a pound. You can count on that not doing that.

What gets a little dangerous, is if that cheese gets over $2 a pound. That does throw the system into disarray, but even a $1.70, $1.80, we can still manage around that number. And, of course, cheese at today's prices makes this a very easy business to run. If we're $0.20 a pound less than we are budgeted on 2 million pounds a week, that is $400,000 in the system. That's a lot of money that we didn't expect to have.

Brad, to your question about the other commodity, we don't see anything that looks like a repeat of the worse conditions in the world that happened in 2008 where so many commodities were at all time highs. We don't see any of that looking out for that other market basket of commodities. It looks pretty normal out there right now from a forward-looking point of view.

Then, just one final -- looking at online ordering and the fact that the pizza category has improved and your transactions have gone up. I have got two questions on online. Did online go up proportionally with that to maintain the same level? And also the facebook and E-mail promotions, things like that, as popularity grows, is that helping online orders?

Brad, this is Jude.

On line, has, as you know, for seven, eight years, now has continued to grow. And it is not just the pizza category, it's the nature of how people order a lot of goods and services. And so, we will feel very, very good that on a percentage basis of our sales, we are the leader in that. Our competitors, because of their size, may have it more in gross dollar volume, but on a percentage basis, we know our percentage is at higher adoption. And we will continue to invest in technology to make sure that we continue to lead with this because it is -- the phone is still a very popular way; walk in, carry out is still very popular. But, online internet -- like I said we will continue to invest and develop throughout 2010 to make sure we are industry leading.

Okay. Thank you.

Thanks Brad.

There are no further questions at this time. Do you have any closing remarks?

No.

Thanks, Jamal. Thanks, everyone.

This concludes today's conference call. You may now disconnect.