Dominos Pizza Inc (DPZ) — Q2 2017 Earnings Call Transcript

Thank you, Kelly, and hello, everyone. Thank you for joining us for our second quarter 2017 earnings call. As you know, this call is primarily for our investor audience, so I kindly ask that all members of the media and others be in a listen-only mode. I also refer you to our Safe Harbor statement that is both in this morning's 8-K release and in our press release in the event that any forward-looking statements are made. This morning we will start with prepared comments from our Chief Financial Officer, Jeff Lawrence; and our Chief Executive Officer, Patrick Doyle, followed by your questions. With that, I'd like to introduce Jeff Lawrence.

Thank you, Tim, and good morning, everyone. In the second quarter, our positive global brand momentum continued as we once again delivered solid results for our shareholders. We continued to lead the broader restaurant industry with 25 consecutive quarters of positive U.S. comparable sales and 94 consecutive quarters of positive international comps. We also continued to increase our store count at a healthy pace, which we believe is more evidence that our brand is strong and growing. Our diluted earnings per share was $1.32, which is an increase of 34.7% over the prior year quarter. This increase resulted from strong operational results as well as a lower effective tax rate. With that, let's take a closer look at the financial results for Q2. Global retail sales, which are the total retail sales at franchise and company-owned stores worldwide, grew 11.8% in the quarter. And excluding the impact of foreign currency, global retail sales grew by 14.1%. The drivers of this retail sales growth included strong domestic same-store sales which grew by 9.5% in the quarter. Our U.S. franchise business was up 9.3%, while our company-owned stores were up 11.2%. Both of these comp increases were driven by order count or traffic growth as consumers continued to respond positively to the overall brand experience we offer them. Our Piece of the Pie loyalty program continues to contribute significantly to our traffic gains. Overall ticket increased slightly during the quarter. On the unit count front, we are pleased to report that we opened 39 net domestic stores in the second quarter consisting of 43 store openings and four closures. Same-store sales for our international division grew 2.6%, lapping a prior-year increase of 7.1%. All four of our geographic regions were positive in the quarter, with the Americas and Asia Pacific regions leading the way. We have had challenging performance in a handful of our 85 markets and are working hard with the teams on the ground to improve those results. We continue to have strong confidence in our international business. The international division added 178 net new stores during Q2 comprised of 201 store openings and 23 closures. On a total company basis, we opened 217 net new stores in the second quarter and 1,281 stores over the last 12 months, clearly demonstrating the broad strength and outstanding four-wall economics our brand enjoys globally. Turning to revenues, total revenues were up 14.8% from the prior year quarter. This increase was primarily a result of increased global comps and store count growth, which also drove higher supply chain volumes. Currency exchange rates negatively impacted international royalty revenues by $1.6 million versus the prior year quarter due to the dollar strengthening against certain currencies, primarily the British pound. As you know, there are many uncontrollable factors that drive the underlying exchange rate, which makes this a harder part of our business to predict. Moving on to operating margin, as a percentage of revenues, consolidated operating margin for the quarter decreased to 30.7% from 31.4% in the prior-year quarter. The operating margin in our company-owned stores decreased to 20.8% from 24.6%, driven primarily by higher insurance expenses, as well as higher transaction-related expenses and increased labor costs. Lower occupancy expenses as a percent of sales benefited the operating margin and partially offset these decreases. Supply chain operating margin was flat at 11.1%. Although margins benefited from lower food costs and lower insurance costs, this increase in margin percentage was offset entirely by increased labor and delivery costs. There was very strong domestic volume growth this quarter and even stronger volume growth in Canada. Market basket pricing to stores increased slightly this quarter. We continue to estimate that the domestic stores' market basket costs will range from flat to up 2% in 2017 from 2016 levels. Before we leave operating margins, I'd also like to note that franchisees in the U.S. continue to share in our success with record profit sharing checks that they have earned alongside us with great execution and performance. As I mentioned before, we also 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 $11.8 million in the second quarter versus the prior-year quarter, driven primarily by our planned investments in technological initiatives, including investments in e-commerce and our point-of-sale system and the teams that support them. Please note that these investments are partially offset by fees that we receive from our franchisees, which are recorded as franchise revenues. Additionally, G&A increased due to higher advertising expenses at our company-owned stores, which increased as a result of our positive sales growth and continued investments in other strategic areas. Moving down the income statement. Interest expense decreased slightly in the second quarter, and our weighted average borrowing rate remained at 4.6%. Our reported effective tax rate was 25.7% for the quarter. As previously communicated, we adopted the new accounting standard in the first quarter, which requires us to record the excess tax benefit on equity-based compensation as a reduction to our income tax provision on the profit and loss statement. As a result of this new standard, there is a $10.4 million decrease in our second quarter provision for income taxes, which resulted in an 11.8 percentage point decrease in our effective tax rate. Again, the economics have not changed, just the way we are required to present it. We expect that we will continue to see volatility in our reported effective tax rate. When you add it all up, our second quarter net income was up $16.5 million, or 33.5% over the prior-year quarter. Our second quarter diluted EPS was $1.32 versus $0.98 last year, which was a 34.7% increase. Here is how the $0.34 increase breaks down. Our lower effective tax rate positively impacted us by $0.20, including the $0.21 impact from the adoption of the new equity-based compensation accounting standard. Lower diluted share counts, primarily as a result of share repurchases, benefited us by $0.02. Foreign currency exchange rates negatively impacted royalty revenues by $0.02. And most importantly, our improved operating results benefited us by $0.14. Now turning to our use of cash. During the second quarter, we returned $22 million to our shareholders in the form of a $0.46 per share quarterly dividend. As we previously announced, we have been in the process of recapitalizing our company, increasing our leverage to match our growing business, which has been our consistent pattern for many years. The recapitalization transaction closed yesterday, July 24, with the receipt of $1.9 billion in gross proceeds. We're happy to report that the deal was very well-received by the lending community, and the interest rates we'll be paying on this new debt are a good reflection of the investment community's confidence in our business and our brand. Now on to some details about this deal. The transaction, which again has taken advantage of the whole business securitization structure, included issuing $1.6 billion of new fixed rate notes and $300 million of new floating rate notes, which were made up of the following tranches: a $1 billion fixed rate tranche at a 4.118% coupon rate with an anticipated repayment date of 10 years; a $600 million fixed rate tranche at a 3.082% coupon rate with an anticipated repayment date of five years; and finally, a $300 million floating rate tranche priced at three months LIBOR plus 1.25%, also with an anticipated repayment date of five years. On a blended rate basis, the new 2017 notes currently carry pre-tax interest rates of approximately 3.5%. When added together with the interest rates from the 2015 notes still outstanding, our weighted average borrowing rate has decreased from 4.6% pre-deal to 3.8% post-deal. We're extremely pleased to have driven down our cost of debt so substantially. Standard & Poor's rated our debt BBB+, which is the top rating in the restaurant industry for whole business securitizations. We are proud of our long-term investment-grade credit profiles and our strong history of performance in this space. Our debt to EBITDA leverage ratio using Q2 trailing 12-month EBITDA is now approximately 5.9 times, up from approximately 4.1 times before this deal and near the top of our previously-stated 3 times to 6 times range. The 2017 notes have scheduled principal payments of 1% of the principal each year, which equates to approximately $19 million per year over the next five years. The outstanding 2015 notes will also begin re-amortizing in Q4 with scheduled principal payments of $3.3 million in 2017 and $13 million in 2018. Our 2015 and 2017 notes will cease principal amortization payments when our leverage ratio falls below five times. With these scheduled principal payments on both our 2015 and 2017 notes and our momentum in the business, we currently expect our leverage ratios to fall over the medium term, consistent with prior experience. We also entered into a new $175 million variable funding notes facility, essentially a revolving line of credit, at LIBOR plus 1.8%. This pricing is a significant improvement over our expiring $125 million facility. The new facility is currently undrawn. However, approximately $44 million of letters of credit have been issued in support of our insurance programs and certain leased properties consistent with our past practice. Use of funds from this recapitalization include $910 million to prepay and retire the remaining balance of our existing 2012 notes, which carried an interest rate of 5.2%. We feel great about swapping out this debt for lower cost new debt. We will also pay fees and expenses related to the deal of approximately $18 million and pre-fund approximately $5 million for a portion of the principal and interest on the 2017 notes. As with our previous recapitalizations, we plan to use the remaining proceeds for general corporate purposes, which may include share repurchases and/or special dividends, subject to approval by our board of directors. We expect to announce a plan for the remaining excess proceeds over the next couple of weeks. This recapitalization and these uses of cash will have a significant impact on our financial statement. And you can expect to see some changes and some noise in the back half of this year. We currently estimate that approximately $17 million in debt issuance costs for the deal will be recorded on the balance sheet and amortized over the weighted average life of the new deal. When you add it all up, the new deferred financing cost amortization schedule, the expected principal payments, and the newer debt at lower rates; we expect as-reported Q3 interest expense to be approximately $33 million on a pre-tax basis. This includes approximately $6 million in deal-related charges and other interest charges, which will be adjusted out as items affecting comparability. For the full-year 2017, as reported interest expense is currently expected to be between $122 million and $123 million on a pre-tax basis, and again, approximately $6 million will be adjusted out as an item affecting comparability. It is important to note that these current estimates of interest expense may change due to borrowings under our VFN and changes in LIBOR that would affect our new variable rate, among other factors. Separately from a non-interest expense perspective, there will also be approximately $1 million of non-capitalized deal costs, which will be expensed in the third quarter and also adjusted out as an item affecting comparability. All in all, our strong momentum continued, and we are very pleased with our results this quarter, including our recapitalization. And with that, I will turn it over to Patrick.

Thanks, Jeff, and good morning, everyone. As I reflect on the second quarter, two main thoughts come to mind. First, how proud I am of our domestic franchisees and operators, as it was yet another phenomenal performance by our U.S. business. Brand momentum, execution and relentless focus on getting better each day continue to drive what we do. And I wake up each day proud to lead and be a part of a company and store-level culture that refuses to level off or become complacent. And second, while we continue to view ourselves as a brand in progress, our international business continues to strive as a store growth engine, with most markets and master franchisee organizations executing at high levels within our over 85 markets worldwide. Our sales performance is soft and below what we come to expect from the best international model in QSR. With this proven foundation, a diverse portfolio of geographies and issues easily categorized as correctable, I am confident we can get top line performance of this business to the levels we are used to. We've gone with football parallels in the past, so I'll stick with what works and share yet another one. I'm pleased we continue to execute the fundamentals without the need for trick plays. On offense, we continue to innovate, keeping our focus on long-term success and making investments that reflect that long-term focus. On defense, we continue to aggressively protect our growing share and competitive position in pursuit of being number one. And all in all, I'm pleased we continue to win. But with that said, we remain mindful of our need to always execute the basics better. And with plenty of game film to break down and learn from, that's exactly what we intend to do. Our U.S. results and ability to sustain and lap outstanding performance continues to amaze me. Our twenty-fifth consecutive quarter of positive same-store sales growth can be attributed to our franchisees and operators just plain getting it done. We have never been more aligned as a domestic system, and our sound simple strategy and sturdy fundamentals continue to position us for success. We opened 39 net new stores in the second quarter, as our domestic store growth continues to track in the right direction. Our internal team and franchisees are showing impressive alignment on the importance of smart strategic growth. And this area of our business, one that has certainly demonstrated opportunity in the past, is moving in a very strong direction. And I continue to be pleased with the progress. I'm also happy to announce plans to open our seventeenth domestic supply chain center in the Northeast sometime in mid-2018. This new center will strengthen our roster of dough manufacturing and food distribution centers in the U.S. and relieve some of the good problems to have, capacity issues we have encountered due to the tremendously high volumes flowing through our supply chain operations. Lastly, while it won't impact results until the third quarter, we recently launched a new product we're very excited about. Our new bread twists are handmade and make for a terrific side item with three flavors to choose from: parmesan, garlic, and cinnamon. This is not only a great addition to the $5.99 Mix and Match menu platform, but a great example of us constantly looking at how and where we can improve. Our talented chefs saw an opportunity to make our bread sides better, and like everything else we do, we test it. We made sure our customers agreed. We're pleased with the results so far, particularly for a product not yet on television and look forward to feedback from customers continuing to give them a try. Wrapping up, our domestic business is getting it done, to say the least. I couldn't be more pleased and proud of the many that are making it happen. I briefly touched on our international business earlier in my remarks and reiterate that our 94th consecutive quarter of positive same-store sales weren't exactly the type of results we've all come to expect within this high-performing business segment. The model is proven and we continue to see terrific performance from many markets, particularly within the Americas, highlighted by another great quarter in Canada. The slowdown in same-store sales this quarter was driven primarily by our Europe region where the issues in a few select markets are known and fixable. As an example, our dialogue with one of those markets, Domino's Pizza Group out of the UK, which released its first-half results this morning, is constant and productive. As we do in all of our international markets, we're sharing best practices, key learnings, and benchmarks around meaningful customer value and order count growth, and working together to improve top line results in the UK in addition to the other markets that were softer during Q2. I'm highly confident we will do so and would add while same-store sales were not as strong, unit-level return on investment remains extremely healthy, and we continue to drive significant store growth in the UK and across our entire international business in both developed and emerging markets at a tremendous pace. We opened a net 178 stores during the quarter, and in addition, continue to grow our technology position abroad surpassing 70% of international stores on Domino's PULSE during the quarter, and over 1,100 stores now on our global online ordering platform. And on that thought technology continued to be at the forefront during the second quarter for the business as a whole, as our Domino's Tracker campaign highlighted a core Domino's digital ordering fan favorite. With our strong unmatched lineup of anywhere ordering platforms, we now look to the future of digital with near endless opportunities in store and within the delivery experience itself to examine and consider, as well as applying data learnings to further enrich an online ordering experience that continually sets the pace for our competitors and peers. In closing, I am extremely pleased with yet another phenomenal quarter from our domestic business and congratulate our franchisees, operators, and domestic leadership for refusing to rest on past success. Instead, they're pushing forward with more energy and vigor than ever. Our work in progress brand and team continue forward with the same approach that got us here, addressing areas that can get better, listening to the customer before listening to ourselves, and establishing global alignment that is stronger than any other within the industry. With three for three and our focus on those elements, we'll continue to win. Thanks, and we'll now open it up for questions.

Hi. Thanks for taking the question. Looking at the UK where you saw some weakness in the quarter, could you maybe help us understand, were there macro factors or competitive factors that were at play there, and when you think about the playbook to regain momentum in the business, what are you most focused on and how quickly do you think some of those things could start to have an impact?

Yeah. Thanks, Karen. I think if you look at the UK, I mean, clearly consumer confidence has been a little bit weaker, but at the end of the day we got to execute in any environment and the team over there is very, very focused on it. I think with consumers where they are, we've got to make sure that we're getting our value offer right, that we're getting our advertising right, and I think there are – I know that there are things in the works to make sure that we're addressing those things in the UK, and that they're going to do it in the relatively near term. So there's a terrific team there. It's an overwhelmingly sub-franchised market and there are great sub-franchisees there. They know how to execute; we know how to execute there. And I'm confident that they're going to get this on track. But certainly there's been a little bit of a shift in the environment there, and we've got to make sure that we're listening to the customers and getting it right.

And a quick housekeeping on the reporting of comps. I knew that Domino's Pizza UK makes a differentiation between reported comps excluding where they've split stores and then what that would look like without excluding that. Which convention do you follow when you're pulling their results up to yours?

We do not exclude splits.

Hey. Maybe just one quick one. Can you talk about the comp flow-through in the company margins, and particularly, insurance costs? How much of that is specific to the second quarter versus sort of an ongoing step-up in the insurance cost line?

Hey, Greg. It's Jeff. Yeah. In Q2 versus Q2 last year, we had a 1.8 percentage point headwind from insurance cost. That's primarily a year-over-year increase in the actuarial update for workers' compensation and auto liability program that we run for our 400 corporate stores. It's an area where we continue to invest behind in safety teams and want to make sure we continue to get the culture right. Quite frankly, the results aren't what we want them to be. We're going to continue to focus on it very aggressively, and we hope that we can post better results on that line item in the future.

Got it. And then maybe one more, just on the thoughts on the supply chain changes that are coming. Is that going to show up where you have one or two new centers you have to add to really fix the issues? Or is this going to be a real rethink of the – just the overall supply chain set-up and kind of rethinking the entire plans as they stand today?

Yeah. We've got new leadership from just 18 months ago in our supply chain now, and Troy has built kind of a fairly new team at the top there, and they've done a full rethink of where we are. I think at the end of the day, the model is going to remain very much the same that we've executed in terms of our own centers and how we're doing it. But as we look at our footprints of centers, more centers that are delivering fewer miles, I think is going to drive greater efficiency for us. So the team has gone through some terrific kind of analysis around how are we going to optimize costs, and those options could have included growing the size and capacity of the existing centers. I think while there will be some of that in a few centers, you are going to see us open some more centers over the next few years. You know, we talked about the first one in the Northeast that we've now got a lease signed and they've turned the building over to us and we're starting to swing hammers there, and that is basically a year process to get that opened. There will be others down the road. But what you're going to see is us kind of expanding the footprint in the number of centers, which ultimately drives transportation efficiencies in those centers.

That's really helpful. Thank you.

Great. Thank you. I just wanted to come back to the domestic system-wide comp, and I think you guys said primarily driven by transactions, and the loyalty program had a significant impact. Any more color you can provide on what's driving the comp in terms of the loyalty program?

Yeah, Peter. You know what? It's honestly the same story we've been saying for a while. So our goal is to be nice and boring and consistent on this. The answer is it is a number of factors. So it is loyalty; it is almost all orders; and only a little bit of ticket in the second quarter. You've got some from kind of just digital and what we're doing and getting more effective on digital media. Loyalty is clearly a big one. A little bit of a boost from television, both GRPs and, I think, the effectiveness of our advertising. And, you know, you've got a little bit of market growth out there as well. Not a lot, but the category is up, I think, a point or two points. And so add to that operational execution and our franchisees and our Team USA stores investing in giving customers better service in the face of some pressure on wage rates, which is ultimately giving our customers a better experience; we'll take that trade-off. So it's a combination of really a lot of things. Our model and analytics give us pretty good read on kind of exactly how that's contributing, and honestly, it is a fairly long list of a number of things that are doing it.

Great. And then just on the international business, and I know there has been some softening and it seems like you're at least for the time being maybe below that long-term guidance of 3% to 6% on comps. What is your confidence on getting back to that 3% to 6% longer term on comp?

Yeah, I mean, our confidence on our long-term guidance remains high.

Thanks very much. If I could also go to international, you talked about a handful of markets, citing the UK in particular. And you made it sound like there was some operational things that may have gone wrong, but how – maybe if that's the case, could you just elaborate on what it is? Is it delivery times or something else? And how confident are you it's not competitive pressure? In particular, the UK is a very advanced market from a food delivery and non-pizza food delivery market. Is that impacting the business in your view? Or any of the other markets as you look at, is there any commonalities from a competitive standpoint that make you think something is changing on that front?

Yeah, John, so first, I don't think it really is kind of operational execution issue. Those can always get better, and there are always opportunities there. I think it's more around making sure we're getting value right, that we're getting the offering right. I think that is more the issue and frankly those are the things that we can control. If you look in the UK at kind of the other delivery options, I think, our perception to date, and it's frankly the same in the U.S., you've got a growing number of players in that space. We simply are not seeing that affecting our business at this point. The one thing that I would say in the UK that's interesting, we don't know that it's had any material effect, but you do see increasing amounts of advertising from the Deliveroos and Just Eats and some of the other players in that market. So if you look at share of voice on a broad basis and include kind of all of the delivery options, there are more advertising there. But to date, from a direct competitive pressure and are people choosing to swap out occasions with other food for pizza, we just aren't seeing that. And we clearly are not seeing that in the U.S. and I think the only thing that we're looking at that's just interesting is share of voice within food delivery more broadly in the UK.

Thank you for that. And then just on the U.S. business, there have been some talk, I'm not sure if it comes from you or franchisees about raising your fee to the franchisees for the technology fee. Can you remind us where the technology fee or the transaction fee is right now, and if there are plans to look at that again given you've got some rising costs in that area, what you might think of raising it to?

Yeah. It's – so the fee is $0.21. We do have the ability to increase that fee, but what I would say is if that fee is increased, and we have increased it in the past, it was increased from $0.17 to $0.21 I think about three years ago. Is that correct?

Two or three years ago, yeah.

Two or three years ago. And that's to fund more investments into the technical – into technology. So from your perspective, if that fee changes, understand that that is going to be coming with increased investments as well. So for the time being, it is $0.21. But if there were an increase, it's going to be about making more investments into technology.

But just from a financial standpoint, it is recorded in your comps or not?

So, this is Jeff. No.

Revenues, yes.

Hi, guys. Thanks for taking my call. This is Jake on for Matt. I was just wondering if you could provide any detail onto the digital sales growth, or what percent of total sales did digital make up in this last quarter?

Yeah. It's still in the same range we've been in. So kind of 60% plus. And I guess what I would say is our pattern has been very, very consistent on this. That in the fall into the winter is when we see that tend to ramp up seasonally, and then it tends to go flat in the spring through the summer. And that has been consistent for five years, six years, seven years, eight years now. So we're right in that 60% range as we have been. And ramps tend to happen a little bit later in the year and early into the following year.

Hi. My first question is on the capital return. And I appreciate you're not – you probably can't comment about what the board will do in the next few weeks. But historically, you've mostly used repurchases to return capital. But there were two times in the past where you did do special dividends. I guess hindsight's 20/20, it would probably have been a better idea to do share repurchases, looking at where the stock is at today, relative to a special dividend. But I guess historically, what led you to do the share repurchases – rather than the dividends in the past? And does multiple over time factor in the decision to do buybacks?

Matt, the answer remains the same as it's always been, which is we go through the analysis at the time and look at what we think is going to help generate the best returns for our shareholders. We are completely agnostic as to what we're going to do. And as you mentioned, we've done pretty much everything since we've been a public company. We have paid special dividends. We commenced a regular dividend. We've done share buybacks. And there was even a point about a decade ago during the crisis that we were buying in debt when we could do it at $0.50, $0.60, $0.70 on the dollar. So we come to each of these decisions separately, look at the set of facts that we have in front of us, and make our decision based on that. And our board will be making that decision shortly, as Jeff said.

Okay. On the CapEx as it relates to the supply chain, can you give us a sense of what these new DCs would cost in terms of the cash for CapEx? And you've been talking for a while about how to – you need to invest in the supply chain to expand capacity in existing DCs and then build new ones. Is this something that's like tens of millions of dollars, or could this be a significantly bigger number over time?

Yeah, Matt. It's Jeff. So when we think about building a new supply chain center, you can think about anywhere between order of magnitude $10 million and $20 million, depending on if we pick up the tenant improvements or the landlord does. And again, that's just an economic decision that we'll make on each of the centers separately based on those facts. But a big new building, think somewhere between 60,000 and 100,000 square feet, full capacity between $10 million and $20 million. We certainly believe that we have more than one of these to build, as Patrick has talked about over the medium term. So we got the first site identified. We got the lease. We're starting to swing hammers. We feel pretty confident that there will be another one to follow pretty quickly. And again, these are great capital problems to have. If we're needing to put money into the capacity of supply chain, that is the best capital dollars that I can spend. So expect it to be material, expect it to be material over time, and again, as for the timing of each individual center, when we get closer, we'll announce that.

Great. Thank you very much. Two questions. Just one following up on the delivery topic, I'm just wondering how you would go about monitoring the success of other restaurants that are launching or testing delivery in the U.S.? And then as you mentioned, there doesn't appear to be an impact to the comp, but would you see it in your delivery or labor costs or the cost of drivers? It just seems like kind of ties to comment in the UK about how you're seeing greater delivery advertising. I would think you're going to see that in the U.S. in coming quarters. I'm just wondering how you read your competitors' success thus far, and perhaps how you protect yourself in the U.S. with your learnings from the UK.

Yeah, I think the answer is because of our geographic coverage in the U.S., we know where delivery services are well-developed and where they're not, and so we can look at New York and Los Angeles and Chicago and big markets where those services – San Francisco, big markets where those services may be more penetrated, whereas you get into smaller markets and they're not available at all in smaller towns. And then can break those markets apart and see whether or not there is kind of differentiation in results, and we're just not seeing it. It just does not show – any way we cut the numbers, it does not show up in our results today as pressuring our comps. And you can argue that at some point, it actually will grow the delivery business in general. But what I would add to that, I've said before but would reiterate, a lot of these delivery services are finding out very quickly that delivery is a lot harder than they thought it was going to be. And some of them are already gone, and there are others who are still kind of understanding what the economics look like around this. And for it to work, it's got to work for the driver, it's got to work for the restaurant, it's got to work for the company providing that service, and it's got to work for the customer. There's got to be value creation for all four of those parties to have a successful delivery business. And I think that there's still a lot of learning going on in this space around how difficult it is to make all of that work. Fortunately, we have 57 years of learning around how to make delivery efficient on food, and our advantages there seem to be holding up very, very well.

Got it. And then just the other question was on G&A and I guess versus – you don't give quarterly guidance, but versus this quarter, it was higher than we had expected. I know your prior guidance I think was for 340 or 345 in terms of millions of dollars in investments in tech and supply chain marketing. But just wondering whether we should read into the spend this quarter, and maybe with the outside fundamental strength, it is compelling to increase your investments, and therefore you'd be happy to go above that $340 million to $345 million, or maybe what the greatest area of opportunity would be if you were to exceed that target?

Yeah, this is Jeff. First thing I'd tell you is that we're not updating our guidance right now on G&A as we sit here today. A long way to go for the rest of the year. Certainly, if we did outperform, particularly given our internal plan, we – you know, we have the opportunity to go higher on G&A, and we would announce – update the guidance for that particular time when we felt comfortable. As far as what we're going to invest in, and when we're going to invest in it and to what amount. I think Patrick has said it very clearly before, when we see really good ideas, whether it's in technology, marketing, analytics, supply chain, we're going to put the money, whether it gets classified as G&A or something else in the P&L, we're just going to chase those good ROI projects. And so, again, no update to guidance right now. But our mindset around what we invest in and when we invest in it has not changed.

Yeah. Thanks, guys. I had a question on average ticket. I know you don't break this out specifically but I was wondering if you could speak to it more broadly on what you're seeing from either a check growth or contraction standpoint versus what you've seen in the past. And secondarily, if you're seeing any impact on Domino's from what seemed to be an increasingly price point oriented peer group within QSR and pizza in particular?

Yeah. So our growth in the second quarter was overwhelmingly orders. Ticket was up just a little bit and we don't see the competitive situation to be really any materially different than it has been in the past.

Got you. And a quick follow-up if I could on the cost of goods commentary. Jeff, you said that the insurance, you did view that as more one-time or that should just continue to get a little bit better in future quarters?

Yeah. So we really hesitate to call anything one-time because we have to get it right regardless of what the line item is. We view insurance cost both to our supply chain and our Team USA businesses as largely something that we can invest behind and hopefully have a positive impact on. We certainly did not see that in Q2 in the corporate store business as we updated our independent actuarial models. And as a result, we had to take that hit in Q2, but what I can tell you is, again, we think it's something that we are investing behind. We're not seeing the results that we want yet. Certainly the more you deliver, the more activity you have, the more opportunity you have for auto accidents or workers' compensation claims, things like that. But we just have to do better in this area. We're investing behind it, and so we hope that over time, volume-adjusted, we can hopefully outperform a little bit.

Understood. Thanks, guys.

Hi. Thank you very much. Just a few follow-up questions on some of the topics that have already been touched on. One is if you go back to international markets, I think some of what we've actually seen there may be more intense competition from direct pizza competitors. So I wanted to see if you saw any risk of that in the U.S., for example, as maybe some of your large competitors announce initiatives to improve their own businesses. And I guess, a related note, one of the sort of sustained competitive advantages I think you have is the technology in the U.S. Is that less of a case in international markets, where you have such a lead on things like digital ordering or loyalty? And then I have one more follow-up.

Okay. So there were a few in there. So first, international markets in general are actually less competitive in pizza than our domestic market on average. There are certainly exceptions to that, but the category is growing faster outside of the U.S. than inside the U.S. The competitive set is generally less restricted, and 95% of the people in the world live outside of the U.S., and the pizza category is probably a little over double the size internationally what it is in the U.S. So clearly far less-developed, less competition, more opportunity to grow. What I would say though is are we looking at kind of competitive pressures domestically and is there any change there? Really the answer is no. There has been no material change on that front. The broad story remains the same that it has been domestically, which is larger players taking share from smaller players. And certainly, we've been doing better than the rest of the large players over the course of the last few years. But I still believe that the longer-term story is the competitive advantage that scale brings to the larger players versus the smaller players. In terms of technology, internationally and where we stand, our penetration of digital orders internationally is a little bit lower on average than it is domestically. I would say that the sophistication of our markets around how technology is getting used today ranges from markets doing a terrific job on this to there are still markets that don't have digital ordering today, smaller ones. And we've now got our offering with our global online ordering and are bringing markets onto that. But I think that there remains still on average a little more opportunity in international to do some of the things we've been doing domestically. And so when you look at our international performance and areas where we think we can improve, one of them is in the digital space. And as part of what gives us confidence about longer-term growth in the international business is there are still things in the toolkit that have not been applied in all of our international markets that we know work, and it just takes some time to roll those all out.

Okay. Thank you. I thought the UK was somewhat ahead, but it sounds like there's maybe some opportunity there where we're seeing softness. But my follow-up was...

UK is very developed on digital, and their digital penetration is very high in the UK. So they've done a good job there overall. There are always opportunities, and there are things that in our conversations with them that we share with them, but frankly, they share with us too. And they rolled out digital ordering in the UK nationally before we did in the U.S. So learning can go in both directions.

Okay. Thank you. That's very helpful. And then just quickly on the U.S., just trying to understand how your customers think about making a delivery order to Domino's? And I know we've sort of belabored this point, but with some of the very large QSRs getting into delivery, it seems that maybe they could compete on convenience, speed of service, or price point, the things that you're so good at. Do you think your customers decide they want Domino's and then they figure out how to access your product? Or do they say I want delivery, and then they figure out what's available? I mean, do you have any sort of research that tells you how customers make that decision so we can think about what the competition looks like?

Yeah. So they actually decide they want delivered pizza, and then they decide the brand on average. And that's part of where we've been making gains is, we make it so easy for somebody who says they want to get pizzas delivered to make us the choice. So we've got everything set up in the Pizza Profile and make it possible for them to order from anywhere, with any technology they're interacting with. I mean that's part of what's been driving the growth that we've had. There are certainly a lot of people who are experimenting with delivery now. And with only a couple of exceptions, Panera has been starting to add their own drivers. Most of them are using third-party delivery services. And what I would reiterate is it's got to work for the driver, the restaurant, the customer, and the people providing that delivery service. And getting all of that right, getting that balanced is a challenge, and I think there are a lot of folks who are kind of understanding how much that's a challenge. But look, we are watching it very carefully. We understand this marketplace very well. We are looking at all of these different players and understanding where people may be doing things well, and where they're not doing it well, and we will take good ideas anywhere we can find them. But 57 years of doing delivery ourselves has given us an awful lot of knowhow, and remains a real competitive advantage. And I would reiterate, we have seen in the more developed markets from other options on delivery zero effect on our sales.

Very clear. Thank you so much.

Good morning. Just a quick question or a couple of questions. One on the U.S. first. Just trying to dig a little bit more into the comp itself. And I'm curious to get your thoughts on whether or not you believe it requires more promotional activity, whether it be lowering the price of the product or more deals during the week or adding more loyalty points per transaction in order to drive these share gains that you're seeing in the market? And then kind of on that same thought, we're now in year two, I think, of seeing store-level margins, at least in the corporate side, contract, so I was curious to hear your thoughts on pricing potentially later this year?

Absolutely no change is the short answer. Our price point, two medium two tops for $5.99 has been the same for, what, eight, nine years now, and our loyalty program has been very consistent with how we launched it. We did one-week promotion around that earlier, but otherwise, everything has remained very, very consistent from a pricing standpoint, both in terms of what we're doing and in terms of kind of the competitive set. We're just not seeing a lot of change out there.

Hi. Yes. Thank you, and good morning.

Good morning, Alton.

I guess just two things. First off, I think I heard you mention, Jeff, earlier in the Q that in total insurance costs were 180 basis point headwind to margin. Is that right? Did I hear that right?

Yeah, you heard that right. The details are on page 15 of the 10-Q, if you want the specifics.

Okay. And then just as far as margin question, obviously, as you mentioned, company-owned margins were down or store-level margins were down almost 400 basis points. How much of that, if you're able to splice it out, will continue or could continue in coming quarters, whether back half of the year and/or beyond? Or is there any other kind of, sort of one-time, short-term items that were in there here in 2Q?

Yeah. I mean, if you look at the year-over-year changes, the biggest thing we had Q2 versus Q2 is the insurance, which I've already talked about. We think that remains an opportunity area for us, not only for the financial ramifications but more importantly, we just owe it to our employees to continue this culture of safety that we have and get better results. On labor, we were up 70 basis points year-over-year. That really was all in more of labor rate at our stores that we run. Again, only 400 stores, but we're in pockets that include New York and Arizona, which both had minimum wage increases. And so as minimum wage rate increases that are on the books or new ones are enacted, it could be a percentage of labor headwinds for us. And then you go up and down. Food hasn't been that big of a deal for us this year. It's been pretty benign. I think when you add it all up and you move away from the percentages, I think it's important to note that despite all these headwinds we have made more money at the margin line in Team USA year-to-date than we did through six months last year. So driving those transaction counts, being consistent with pricing and promotion that Patrick spoke about, I think at least gives you a chance to be competitive when it comes to bottom line dollars here, and that has certainly been our focus as we try to balance some of these headwinds.

And I'm going to add one thing on that which is I'll first clarify, so on labor rate. So our team actually leveraged labor hours. So the increase in labor is more than all-in wage rate versus hours, so they were still getting some efficiency in the hours used, and it's not just minimum wage. There is pressure out there on wages in general as the labor market continues to strengthen, and that's a really high-class problem. When strength in the labor market is putting pressure on rates, that's the way you want to see it working, and we are always going to be conservative about reacting to that with pricing to our customers. So it is far easier to make a short-term move on pricing and protect a little bit of margin. We don't think that's the right answer. We pay what we need to pay to keep our stores staffed and give our customers great service. When there is pressure on those wage rates, we're going to be cautious of passing that through because we want to make sure that we're getting that right. And so, when you're seeing some of this movement, you may see a little bit of a lag in the short-term. It may have some effect on margins, and then we kind of fine-tune pricing where we can but we want to be conservative around that. And I would add, our franchisees are prospering right now. They're doing very, very well, but I would applaud their discipline around this as well. They want to make sure that they're taking care of the customers. They're putting that first, and then where we take some price, it's done conservatively and cautiously to make sure that we're not going to chase off customers.

Great. Understand. Thank you, Patrick and Jeff.

Hi. Thank you. The comments you made, Patrick, earlier of your share of voice, I guess, delivery competition broadly increasing in the UK, certainly we understand that from a customer perspective, but is that market seeing any particular demand of staffing around delivery drivers? Not just cost, which I think can be understood, but the ability to execute the brand that you want during your peak hours, and is that competition materially changing as delivery increases overall in the market?

Yeah, I think, look, DPG is a public company, so I think getting into the specifics, we will always let them kind of talk about the real specifics there. But I guess what I would say is we're confident in their ability to manage through that, and in terms of the share of voice, the pizza category in 2016 had exactly half of the share of voice on delivered foods. So if you look at Domino's and Pizza Hut and Papa John's in the UK in 2016, collectively we spent exactly the same amount on advertising that Deliveroo did and Just Eat and some of the others, and that's a change. So I'll let them kind of answer around the specifics on pressure on hiring drivers. There is certainly some, but I think it's very manageable. But the advertising one is interesting. We don't know that it's having an effect, but it's certainly something that we're watching.

Thank you all for your interest in getting on the call, and we look forward to discussing our third quarter results with you on October 12.