Dominos Pizza Inc (DPZ) — Q4 2017 Earnings Call Transcript

Thank you, Amy and hello everyone. Thank you for joining us on the call today about the results of our fourth quarter and full year 2017. As you know, this call is primarily for our investor audience, so I kindly ask that all members of the media and others be in a listen-only mode. In the unlikely event that any forward-looking statements are made, I refer you to the Safe Harbor statement you can find in this morning’s release and the 10-K. As always, we will start with prepared comments from Domino’s Chief Financial Officer, Jeff Lawrence and from our Chief Executive Officer, Patrick Doyle, followed by your questions. With that, I'd like to turn the call over to our CFO, Jeff Lawrence.

Thank you, Tim, and good morning, everyone. We are thrilled to report our results for the fourth quarter and full year fiscal 2017. During the quarter, we continued to build on the positive results we posted during the first three quarters of the year and delivered strong results for our shareholders. We continue to lead the broader restaurant industry, with 27 straight quarters of positive U.S. comparable sales and 96 consecutive quarters of positive international comps. We also continued to increase our store count at a healthy pace as we opened more than 400 net new stores in the fourth quarter. Our diluted earnings per share was $2.09 which is an increase of more than 41% over the prior year quarter. This increase primarily resulted from strong operational results and a lower effective tax rate. With that, let’s take a closer look at the financial results for Q4. Global retail sales, which are the total retail sales at franchise and company-owned stores worldwide, grew 11.7% in the quarter. When excluding the impact of foreign currency, global retail sales grew by 9.9%. This global retail sales growth was driven by an increase in the average number of stores opened during the quarter and same-store sales growth. Same-store sales for our domestic division grew 4.2% lapping a prior year increase of 12.2%. Same-store sales for our international division grew 2.5% lapping a prior year increase of 4.3%. Breaking down the domestic comp, our U.S. franchise business was up 4.2%, while our company-owned stores were up 3.8%. These comp increases were driven by ticket and to a lesser extent continued order count growth. The ticket growth in the quarter resulted primarily from a higher number of average items per order in Q4 as compared to the prior year. On the international front, all four of our geographic regions were again positive in the quarter with Europe and the Americas leading the way. Canada, Russia, Turkey and India were among the markets that performed particularly well during the quarter. Our Q4 2017 comps were negatively impacted when compared to the prior year as our Q4 2017 fiscal calendar did not include New Year’s Day. We estimate that both our domestic and international comps were negatively impacted by approximately 0.5 points due to this calendar shift in Q4 2017. We expect Q1 2018 to be positively impacted by this calendar shift. On the unit count front, we are very pleased to report that we opened 96 net domestic stores in the fourth quarter consisting of 102 store openings and 6 closures. For the full year, we opened 216 net domestic stores. We are also very pleased to announce that our international division added 326 net new stores during Q4, which included the opening of our 9,000 store internationally. The 326 net new stores were comprised of 339 store openings and just 13 closures. For the full year, we opened 829 net new stores internationally. As a reminder, we converted more than 250 stores in 2016, which significantly impacts the year-over-year comparison. Our international growth continued to be strong and diversified across the market driven by outstanding unit level economics. When adding the domestic and international store growth together, we opened 1,045 net new stores globally in 2017 demonstrating the franchisees’ continued excitement and commitment to our global brand. Turning to revenues, total revenues for the fourth quarter were up $72.1 million or 8.8% from the prior year. This increase primarily resulted from three factors. First, higher supply chain center food volumes, driven by strong U.S. comps and store growth. Second, higher international royalties from store count growth and increased same-store sales as well as the positive impacts of changes in foreign currency exchange rates. And finally, higher domestic same-store sales and store count growth resulted in increased royalties from our franchise stores and higher revenues in our company-owned stores. Currency exchange rates positively impacted international royalty revenues by $2.1 million in Q4 versus the prior year quarter due to the dollar weakening against certain currencies. For the full fiscal year, foreign currency negatively impacted royalty revenues by less than $1 million. Now moving on to operating margin, as a percentage of revenues consolidated operating margins for the quarter increased to 31.5% from 31.1% in the prior year, driven primarily by our global franchise business. The operating margin in our company-owned stores decreased to 24.6% from 24.8%, driven primarily by higher labor wage rates and insurance expense. Lower occupancy costs and lower sales-based transaction fees benefited the operating margin and partially offset these decreases. The supply chain operating margin decreased slightly to 11.1%. The primary drivers of this decrease were higher labor, delivery, and insurance expenses as compared to the prior year quarter. Procurement savings benefited operating margins and partially offset these increases. Before we leave operating margins, I would also like to note that franchisees in both the U.S. and Canada continued to share in our success with record profit-sharing checks that we have earned in partnership with us, with great execution and performance. As I have mentioned many times before we expect to make additional investments in the supply chain in the near-term to medium-term to keep up with our rapid growth. Let’s now shift to G&A. G&A increased by $1.6 million in the fourth quarter versus the prior year quarter, driven primarily by our planned investments in technological initiatives including investments in e-commerce, our point-of-sale system, and the teams that support them. Please note that these investments are partially offset by fees recorded as revenues that we received for digital transactions from our franchisees. Continued investments in other strategic areas also contributed to the increase in G&A. Lower performance-based compensation and a $4 million pretax gain on the sale of 17 company-owned stores to franchisees partially offset these increases. Moving down the income statement, net interest expense increased by $5.3 million in the fourth quarter, primarily as a result of increased net debt from our 2017 recapitalization, this was partially offset by a lower weighted average borrowing rate of 3.8% as compared to 4.6% in the prior year quarter. Our reported effective tax rate was 31.7% for the quarter. There was a $6.8 million decrease in our fourth quarter 2017 provision for income taxes as a result of excess tax benefit on equity-based compensation. This resulted in a 5 percentage point decrease in our effective tax rate. We expect that we will continue to see volatility in our effective tax rate related to equity-based compensation. As a result of the Federal tax reform that was enacted before year end, we revalued all of our deferred tax assets and liabilities and the effect on a reported tax provision in Q4 was not material. When you add it all up, our fourth quarter net income was up $20.6 million or 28.3% over the prior year quarter. Our fourth quarter diluted EPS was $2.09 versus $1.48 in the prior year quarter. Here is how that $0.61 increase breaks down. Our lower effective tax rate positively impacted us by $0.19 including a 15% positive impact related to excess tax benefits on equity-based compensation. Lower diluted share counts primarily as a result of share repurchases during the year benefited us by $0.18. Higher net interest expense resulting from a higher net debt balance during the period negatively impacted us by $0.07. And most importantly, our improved operating results benefited us by $0.31, including $0.05 from the gain on the sale of company-owned stores and a $0.03 benefit from the impact of foreign currency exchange rate on royalty revenues. Now, turning to our use of cash, first and most importantly, we invested more than $90 million in capital expenditures for the full year as we continue to aggressively grow our technology capabilities and invest in supply chain to keep up with our rapid growth. During the fourth quarter, we repurchased and retired approximately 277,000 shares for $51.5 million at an average purchase price of approximately $186 per share. We also received and retired nearly 660,000 shares in connection with the final settlement of our $1 billion accelerated share repurchase program which we discussed on the Q3 call. For the full year, we repurchased 5.6 million shares for $1.06 billion at an average price of approximately $191 per share. During the fourth quarter, we also returned $39.7 million to our shareholders in the form of a quarterly dividend and made $8 million of required principal payments on our long-term debt. Subsequent to year end on February 14, our Board of Directors increased our quarterly dividend approximately 20% to $0.55 per share and authorized a new program to repurchase up to $750 million of our common stock, which replaces our previous program. As always, we will continue to evaluate the most effective and efficient capital structure for our business as well as the best ways to deploy our excess cash to the benefit of our shareholders. As we look forward to 2018, I would like to remind you of our 2018 outlook that we shared with you at our Investor Day in January. We currently project that the store food basket we used on our U.S. system will be up approximately 2% to 4% as compared to 2017 levels. We estimate that the year-over-year impact of foreign currency on royalty revenues in 2018 could be flat to positive $4 million. If foreign currency rates today held for the full year, that impact would be more favorable. In 2018, we expect our gross capital spending to be approximately $90 million to $100 million as we will continue to capital into technology innovation, supply chain capacity and capabilities, including our new supply chain center expected to open later this year and to a lesser extent company-owned store openings. We expect our G&A to increase due to our investment in e-commerce and technological initiatives. We expect total G&A expense to be in the range of $380 million to $385 million for 2018. Keep in mind that G&A expense can vary up or down by among other things our performance versus our plan as that affects variable performance-based compensation expense and other costs. Separately, I would also like to remind you that we will be adopting the new revenue recognition accounting standard in the first quarter of 2018. We will be required to report the franchise contributions to our not-for-profit advertising fund and the related disbursements growth on our P&L. We are currently assessing the proper classification of expenses on our P&L as a result of this change. We do not expect this guidance to have a material impact on our reported operating or net income. However, this new guidance will result in us reporting significantly higher revenues and expenses currently estimated to be well north of $300 million. Overall, our tremendous momentum continued and we are very pleased with our results this quarter and for the full year. We will remain focused on relentlessly driving the brand forward and providing great value to our consumers, our franchisees and our shareholders. Thanks for joining the call today and now I will turn it over to Pat.

Thanks, Jeff and good morning everyone. Many of you attended or listened to our Investor Day last month and while the focus was on the state of the business, our strategy, and outlook going forward, there was obviously some additional news that I addressed at the beginning of the events. While we have the opportunity today, I wanted to briefly reiterate one of the key accomplishments I noted in deciding to move on to the next chapter following my time at Domino’s succession and my emphasis on leaving the business in the hands of incredibly strong capable leadership. This was an extremely important element of the decision process for me and I look forward to more of you going to spend time with Rich and gaining understanding of his skills, attributes, and strategic approach as the next leader of Domino’s. With our transition now underway, I want to officially welcome Rich to the table for his first earnings call since the announcement and note my confidence in passing the leadership baton to him this July. I will provide further remarks on this during my final earnings call in April, so let’s get to what’s most important: our outstanding 2017. Make no mistake, I am very pleased with our quarter and the contribution to our overall 2017 performance, which continues to set the standard within our industry. We continue to set the bar high and deliver on bottom line earnings performance, which we did nicely yet again in the fourth quarter. International full-year same-store sales were within our 3-year to 5-year guidance, while our full-year domestic results continued to impress well ahead of the top end of our guidance range featuring a plus 30% comp on a 3-year basis. Unit growth continued to progress domestically and combined with the reliable engine of international store growth, we are delivering on a healthy blend of retail sales growth contribution we have discussed steadily throughout 2017. This is important, both our corporate performance and more importantly that of our franchisees is dependent on a mentality centered around long-term enterprise growth that doesn’t just come with either comps or units within a silo. It takes both to truly build a fortress and I am very pleased that the way this balance continues to come into shape. I discussed at last year’s Investor Day my thoughts on the importance of store closures and how it is often a key and underrated metric on measuring the stability and potential for any business. It’s been an issue for many within our category. With that, our 13 domestic closings for the year, let me repeat that: that’s just one more time, 13 domestic closings for the year combined with only 62 around the rest of the world for a total of 75 global closures in 2017, with the lowest amount of closures we have had in over two decades and one of the more favorable signs highlighting the continued momentum surrounding our model, performance, and unit economic strength within this business. Our U.S. results in the face of the most difficult fourth quarter lap in our recent history, we are solid. In addition to our 27th consecutive quarter of same-store sales growth, I am extremely pleased with the net 216 domestic stores for the full year and the impact it had on our impressive retail sales growth, which cannot be understated. I am proud of the team and our U.S. franchisees who continued to show commitment to aggressive unit growth, which wasn’t necessarily the case a few years back, all while staying focused on investing in re-imaging. We are now substantially completed and excited for our customers, particularly those helping grow our carryout presence, to get used to having one of the freshest new images and store designs in QSR be truly market wide. I am also very pleased for the first time in over a decade to say that in 2017, the U.S. was our fastest growing global market in terms of store growth. Year end results always remind me to note the extraordinary performance and solid relationship and rapport we continued to demonstrate with our outstanding franchisees, a group that is absolutely second to none. We came into 2017 wanting to maintain this impressive alignment and I credit both our company and franchisee leadership for beginning 2018 in that exact same position of strength. While this cannot always be measured, the importance of this can in no way be underestimated. To our franchisees who have impressed me with our continued refusal to be complacent, I thank you for your continued passion for our customers and our brand. I look forward to winning together in 2018. Moving on to international, we have now reached 24 consecutive quarters of same-store sales growth. This unprecedented and rather unbelievable streak is a continued testament to a team focused on retail sales growth with a focus on fortressing territories and building to keep a leg up on competition for the long-term. I am pleased with our full year results within the 3-year to 5-year outlook. And while our cost for the quarter was below our range, that has showed a bit more volatility than usual of late, I am confident the business will continue to deliver strong top line results and more importantly, continue to deliver tremendous unit growth, 829 net new stores for 2017 to be exact. The long game strategy of fortressing against the competition is highly visible, most notably and recently in India with the departure of a competitor. We didn’t comp them out of the market, but instead relied on unit economics that encouraged rapid growth and continue making it extremely difficult for others to get their foot in the door. This approach, which is being executed globally, is perhaps one of the more exciting strategies around the future of our business. Needless to say, it’s working. The dialogue with all markets continues, particularly within an Asia-Pacific region that was fairly soft during the fourth quarter. Our master franchisee partners are assessing structural and leadership changes and we will address a situation that we see as fixable and correctable within the relevant markets. The remainder of our regions and territories performed quite nicely including our large public master franchisees, notably the UK, as well as India under its new leadership. All-in-all, while there are areas to collect and continue to improve, I am pleased with the results this extremely strong model continued to produce and am excited as ever about our future and continuing to aggressively grow and fortify in all markets and territories driven by our strong master franchisee base that continues to get it done. We continue to set the bar on the importance of investing and innovating within technology. 2017 featured many highlights, including growth of our AnyWare suite of ordering platforms with another strong year for digital loyalty, the emergence of voice and Alexa as a glowingly popular ordering option, and more recently our first meaningful test of self-driving vehicle delivery. As we discussed at our Investor Day last month, we are the technology disruptors, as it is shown by the technology fee increase, our franchisees committed to beginning this year pledge we will invest to stay ahead in 2018 and beyond, making every effort to keep the advantage we have worked so hard to build. In closing, I am pleased with the fourth quarter and feel tremendous about the momentum of our brand and business coming off of an outstanding 2017. We continue to rely on a long-term strategy and approach and emphasis on customer insights over our own, a disregard for complacency, and playing offense over defense in extending the competitive leads we have built, all on the path of reaching our goal of being the global dominant number one. Thanks. And we will now open it up for questions.

Great. Thanks. So I just wanted to ask about the U.S. comp I know that the magic number was 4.2, there was a 50 basis points impact from New Year’s Day, but I think even if you include that, there was a pretty sizable deceleration on a 2-year stock basis, anything else you guys can call out in the U.S. market that may have showed some softening this quarter?

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

Okay. And then on the international business, I think you said the Asia-Pacific region was a little bit softer, can you maybe elaborate a little bit on what you are seeing there and what steps you think you will be taking to resolve this issue?

Yes. So you probably saw that Domino’s Pizza enterprises out of Australia already released last week. There was some weakness in Japan in particular, but overall, we feel very good about the business. They have had a leadership change in Japan now. We are getting a little focused on value there. It’s been a great business. I think it’s going to continue to be a great business there. And you may have seen in their release, they already called out the first I think 5 or 6 weeks of results heading into the New Year and those were already doing better. So, I think we feel good about the business over the medium and long term and again you already saw some re-acceleration of that business early in 2018.

Great. And then just last question from me on the G&A side, your G&A was a lot lighter than what we were anticipating, I know you called out the gain on the sale, on the lower stock-based compensation, was there anything else in the G&A, did any of the projects get pushed into 2018 that were supposed to be in 2017, anything else or are those the two items in G&A that would explain the difference versus your guidance?

Yes, Pete, it’s Jeff. First thing I would tell you is we are full speed at all of the strategic investments. We are not going to slow down on that. You continue to hear us say that. So everything that we wanted to give, we did and that will continue into 2018. The little bit of missing is really the two items you mentioned, one was the gain on the store sales to franchisees about 17 stores in Q4 and the other one was we didn’t do as well versus our plan this Q4 compared to Q4 back in 2016. So, your year-over-year comparison there also led to lower overall expense, but most importantly, the strategic investments are on track and we continue to invest in those areas.

Alright. Thank you very much.

Thanks, Pete.

Hi, this is – I think the first time we have heard you talk about some procurement savings on the supply chain side. So, do you give any sort of color around that magnitude and then sort of how to think about the cadence of that as we moved through next year?

Yes. I mean, really the procurement savings are really what you would come to expect from a brand that’s really scaling pretty rapidly and had a little bit more market power than it had even 2 or 3 years ago. So, our team in supply chain did a fantastic job up there of just continuing to source very high quality, safe food ingredients, but at a lower overall cost and of course that flows through to the benefit of supply chain margin, which franchisees share with us 50-50 there. So everybody wins in that, but the important thing is we are not going to degrade the product in that process, we are going to make sure that we continue to improve the ingredient quality and also drive down food cost at the same time.

Yes. The only thing, Karen, I would add to what Jeff just said is you did see confirmation from our competitor on their retail sales last year. We are now bigger than which we have called out at Investor Day, but I will tell you our terrific procurement team made sure that all of our supply partners are aware of the fact that we are the largest and expect to be treated that way and so scale matters and the fact that we are now the largest globally and in the U.S. in the pizza industry matters and clearly we are going to press that with our partners.

And then also on the distribution margins, I think one of the reasons prior to the upside – so prior to the upside has been some pretty broad spread concerns about just freight costs in general, logistics costs that we have heard through this earnings season. And I think a big challenge has been managing through pretty large spikes on spot freight markets. Could you walk us through or give any sort of color on how much of your distribution are you relying on third-parties versus doing it completely – and currently where you might not be exposed to that?

Yes. So this will probably not come as a surprise given our point of view on other parts of our business, but we own delivery of the food to the store just like we own delivery of food to our consumers, our customers. And so we have a very large fleet of lease tractors and trailers that enabled those 2 to 3 deliveries a week to all of our stores in both the U.S. and Canada. We have not seen any material spike of cost in our business as a result of anything going on in the spot freight market. We are usually able to get out in front of that in a pretty good time, and so we don’t expect any pressures there and certainly there was no disruption for us in Q4.

Great, thank you.

Yes, thanks guys. I had a question on domestic comps and we have seen over the past year to 2 years, this comp is being heavily driven by transactions and it sounds now like that shifted a little bit in the quarter toward ticket playing a larger role. So, can you talk about what’s driving that ticket growth in the average items for order as you mentioned earlier and how comfortable you are with ticket growth rising over time?

Yes, it’s Jeff. So, again we did a 4.2% in the quarter, roll on a 12%, little bit more tickets and orders, but both were healthy and both contributed to the overall comp. We did have that 0.5 point shift again on New Year’s Day, which muted it a little bit. But really there were a couple of different things that contributed to a little bit more ticket in the quarter and the biggest one is the one I called out which we just sold a little bit more food per order, which is kind of the best way to get ticket. What it wasn’t about in Q4 was us getting undisciplined around pricing or our franchisees getting undisciplined around pricing. We remain in lockstep around delivering great value to our consumers, the $5.99 mix and match we were on TV a bunch with that in Q4, which is what you have come to expect. And so as we roll into 2018, the role is to do what we always do which is to grow orders and just be real thoughtful about ticket and the construct of tickets. So, we can’t comment on 2018, but there is no bad news for us in the fact that ticket was a little bit bigger in Q4.

Great, thank you.

Hey, guys. Just the first one on I think if as I look at your franchise revenue growth in the domestic side this quarter, it was up about 5% even though you had a 4% increase in units and a 4% comp, can you maybe explain what sort of dragged down that, because I know you took the fees up on your franchisees on the digital side versus last year. So, I am curious what the offset is? And then just a second question, Patrick, can you talk a little about, I know we saw your Australian partner comment on third-party aggregators in the release, and maybe update us on in terms of how you think about external parties from an aggregator perspective versus a delivery perspective and sort of where you are coming from with that?

Yes, Greg, it’s Jeff. I will take the first one and then I will take third-party over to Patrick for the second one. On the royalty revenues, really not a lot change in there. The contractual rates generally are still the contractual rates. You might see a little bit of bounce around. The one thing I would point out is as you know we do offer some incentives for new store growth in the launch, which as they get going helps to defray some of the opening costs there that might take down the effective rate a little bit, but again that’s been pretty consistent. You mentioned the technology fee, which for ‘17 was the same as it was in ‘16, so really nothing there other than the additional mix of obviously increasing digital generally, but nothing really that we see bouncing around in revenues.

Yes, and Greg, on the aggregator, we really talked about this at length at Investor Day in January, and first of all the comments that came out of Australia, they are testing using some of the ordering portals, but not delivery, and they are going to continue to control the customer experience and we think that’s very important. A reminder nobody does more restaurant orders digitally than us, and nobody does more delivery than Domino’s. We understand the economics of that, customer behavior related to both the ordering, and delivery process better than anybody. And we have built real competitive advantage over the years by doing it ourselves. So accessing orders and customer base is something that’s been tested many places, but the delivery process and the efficiency of the delivery process is something that we know and understand very, very well. And that’s not something that you are ever going to see it’s outsourced, because we believe as we have said in January, the only way to build long-term competitive advantage is to do something yourself. So if you use third-party, you are basically deciding this is something where we are not going to build competitive advantage. And if you do it yourself, the only reason to do it yourself is because you think you can do it better than you could do by accessing third parties.

Thank you for perspective. I appreciate it.

Good morning. I have a question on the international revenue growth, it grew at around 26%, which is materially better than what would have been implied by the comp, than the units in the FX, so the question is what drove that increase, was it something with conversions now paying royalties or tech fees or AUV differences and some like that?

Yes. Matt, it’s Jeff, it’s a little bit of all that stuff as the older conversions start to roll up, they will obviously start to pay a little bit more. We also have an acceleration in what Rich has talked about around the global online ordering platform and the deployment of PULSE more globally. Those are obviously bringing revenues into that line item as well. And so it’s a little bit of all of that stuff, which is I have seen the increase there, in addition obviously the store growth and the comps.

Got it. And on the asset sales, was the rationale for selling those stores in the fourth quarter, it was only $4 million for I think 17 stores, that would likely imply lower than average profit. I am curious what the rationale was in this quarter and then did that have any impact on the company margins in the fourth quarter?

Yes. I will answer first and then kick it over to Jeff. First of all, $4 million is just the game, that’s not the sale price. But what we have said in the past is we are always going to look at kind of our corporate stores and where they are. These stores that were sold were stores that were a little bit further out geographically from some of our others. We are also building stores, increasing density in some places, where we are already operating. So this is kind of within the range of if you will ongoing portfolio management of our corporate stores and the specifics and I will kick it over to Jeff.

Yes. The only thing I would add to what Patrick – you covered it pretty well is the sales actually took place a little later in the quarter. So you won’t be as big of an impact on any of the team USA margins or the franchise revenues. You will really see that flowing through in Q1. And as far as geographical just happened to be a couple of stores that were run in the East Coast in the Virginia, Carolina area. But again that’s less important than Patrick’s point which is normal portfolio management.

Okay, got it. Thank you.

Thanks and good morning. First, you highlighted the carryout opportunity at the recent Analyst Day, how did carryout relative to delivery perform this quarter?

Yes. They both did great.

Okay. And then Patrick, you would – you answered the last question – a few questions ago about never wanting to outsource delivery, but you didn’t answer the question about whether the order aggregation to be something you would be willing to outsource, meaning is there an opportunity to expand the marketplace by using an aggregate resource or even if you deliver them understanding that the economics have to be compelling and is that a real opportunity in your mind in the U.S.?

Well, it’s something that’s that we have looked at. I guess what I would say is, first you are going to start to by saying okay, what is order aggregation. So I could argue today that Google is an order aggregator, right because there are lot of people who are looking for food go in and they start the process by Googling the restaurant they want to go to. And we use that. We buy keywords like our competitors do and a pretty reasonable portion of our sales wind up going through portals like that. So as those portals evolve, how we use them and the return on investment for those, we are always going to look at that. But if you look at the largest order aggregator in the U.S. today they are charging 15% of ticket on average to restaurants that you are big, you are going to pay less than that and that’s without delivery, that’s something that for us is clearly not economic. Our franchisees are paying $0.25 which is a little bit over 1% and that’s why we have got our loyalty program we are generating the data. It just is a terrific experience for the customer if they are going through us, it all ties into our point of sale system. So it’s easier and more efficient in the stores. So the answer is never say never because pricing may change dramatically and kind of how people operate as portals may change. So it’s certainly something we are looking at, but is that a big near-term opportunity moving outside of the places where we are sourcing today, I don’t think the economics support it, but those economics may well change over time.

Thank you.

Thanks John.

Yes. Thanks. Can you guys hear me?

Yes.

Okay. Just one, I am going back to the sort of the aggregator question which I know this comes up every quarter, but if you can talk about the mix of kind of urban sales versus suburban if you are seeing any sort of divergence there that you may have referenced in the past?

Yes. I mean really no different than what we said before, it certainly those aggregators today are stronger in urban areas. If you dig down into their economics, their economics deal – they still struggle with how to take care of the customer, the driver of the restaurant. There likely been more articles coming out around the struggles that restaurants are seeing in generating incremental volume out of that. But in terms of how that’s shifting there really has not been a real change in that.

Okay. And then the other question just going back to the food inflation outlook, did you guys see that sort of accelerating through 2017 and is that something that you think kind of is going to be higher as you move through the year or is there anything on the pacing of that would be helpful?

Yes. I mean again it wasn’t a bunch of commodity inflation or food basket inflation for us on the whole in 2017, up a couple of points which was – which is basically in the range that we told you we would be in, a little bit more in the back half than the front half of 2017. But again that’s kind of split here is a little bit – the point was it was pretty favorable for the restaurants and going into ‘18 again a 2% to 4% over a really good ‘17 year. We don’t think commodities are going to be something that has a big impact on our store economics.

Great. Thanks a lot.

Hi. Thank you. Patrick, in your prepared remarks, you used the word fixable and correctable in relevant markets, I think referring to international. I mean I thought those were interesting words and I think perhaps to be put in the context of these issues of being avoidable in the first place, I guess will you kind of comment on that whether you think your franchisees can be more proactive in terms of avoiding some of these things that need to be fixed and as we kind of think about the corporation over the next 3 years or 5 years if you want start getting more involved as a corporation in the affairs of the operations, right, you may be even a little bit more in the tactics of some of your larger international franchisees if comps aren’t used to be?

Yes. John I think it’s interesting. If you look back over the course of 2017, we had a little bit of a slowdown early in the year with the UK. And the UK is very much back on track. India had a period of time where it slowed down and it is now doing very, very well again. I think it’s just a function of you are always going to do your best with the research that you have and make as logical decisions as you can, but every once in a while you just don’t get it right. And when you saw the release from DPE about Japan, they talked about a promotion during the Christmas holiday time period that hasn’t worked out well for them. And I have been look, it was just a misfire. And what I would point out is a reminder that – when they released their results, their first half results for them that was a half, but the problem that they were talking about was all within the fourth quarter as it was leading into the holiday. And you already then saw them talking about how they were doing at the beginning of 2018. So, part of the fixable comment was frankly, normally, I wouldn’t talk about something within the quarter, but they had already released those numbers as part of DPE and it was already doing better. So clearly, it was flexible. So, I think the overall answer John is we are always giving opinions as asked and we are talking to them about what we think the right approach is going to be, but ultimately that’s the decision of the master franchisee and we have got phenomenal master franchisees who understand their local markets and the dynamics there better than wherever going to and most of the time because of now multiple decades of positive quarterly performance, they do a pretty good job. Every once in a while they are going to miss. And in 2017, it seemed to kind of rotate around the world who have a little bit of a miss, but everybody is good at this and we are confident that they can get it back on track.

And do you think that the global shared services model or the global shared data model is fully optimized? I mean I think there is always opportunity, but do you think there is any big opportunities to maybe apply some of the global learnings at Domino’s even more to local markets when they have the little issues that appear?

Yes, I think there are, I mean and it is part of why if you look at our point-of-sale system that is now in the majority of our international stores that means we have got better access to data not only for us, but for them, because we are making sure that the data is being cleaned properly and that it’s going to help them make good decisions. And we still have a relatively small number of or small percentage of our stores on our online ordering platform outside of the U.S. It’s currently what 1,700 – 1,300 stores outside of U.S. on that platform. So that helps. So when we can do that, it gives us a little bit more visibility into it, I guess that kind of leads towards a bit more of your shared services comment, but it is why we think that’s important and why you continue to see more and more markets that are getting on to our platform.

Thank you.

Thank you, John.

Thank you. Hi, good morning, gentlemen. Just a quick question, I think most of what has been asked already. But just from a competitive standpoint either in the fourth quarter or how we are seeing today in the first quarter, it was of course news out there as it appears to pizza of being more aggressive, maybe some smaller closures responding to that. Did you see any impact from them in the fourth quarter and/or in the first quarter?

No, I mean their retail sales were negative in the U.S. in the fourth quarter and over the course of the year. Ultimately from a competitive standpoint, it’s going to be all about retail sales. So, no, we really didn’t see any difference.

Okay, thank you. And then one quick follow-up just on the commodity front being up 2% to 4% where cheese is at right now, I mean, is there any downside potential to that range as you kind of look out over the rest of the year, Jeff?

Yes, it’s again 2% to 4% all-in is what we are currently estimating for what the stores will experience. We can over or under-perform that based on what happens in the marketplace for different food items up and down the list. We are able to enter at times into certain price agreements to lock up some of the volume at certain prices. We can’t tell you what we have and haven’t done for 2018, but listen, I don’t know where cheese is going, I don’t think anyone tells where cheese is going. I think the important part for us is we have shown a real good discipline with the U.S. franchisees around sticking on message and executing at a high level regardless of what happens with food cost, regardless of what happens with labor rates, they are just doggedly determined to continue to build share the hard way and so kind of regardless of where commodities may or may not go, I think our guys have the right attitude out in the field and that’s what matters the most.

Great, thank you.

Thank you. Good morning. If you think about some of the things we have been hearing out in the marketplace from the international players on fortressing in the splits, there seemed to be some concerns about what it might mean and I know you are very focused on growing the global sales. So when do you think in the U.S. we can start to see more of a material impact on the retail sales growth and how should we be thinking about it in terms of returns at the existing units, what it means on these new units and really what kind of impact this fortressing could have in terms of a drag on comps, how should we be thinking about it really from a timing standpoint? Thanks.

Well, let’s say is the return on investment for franchisees is as good as it has ever been which is ultimately what’s generating the energy around store growth that we have seen. When we look at the guidance that we have given to the market of 8% to 12% on retail sales, we think the best way to do that is with a balance between comps and store growth. You have seen a very good balance from international for a number of years. And I will tell you that if you expressed that there are concerns around that from international not coming from our master franchisees, there maybe people in the market who are talking about it, but the returns for the franchisees are very, very strong, which is why they are continuing to generate strong store growth. In terms of the effect on the business, we were over 200 net on growth for U.S. this year, which means you are looking at something now approaching 4% growth in the store count and so there already is some effect in there on our domestic comps, but all of that is already taken into consideration when we have reiterated our guidance of 3% to 6% comps for both domestic and the international at our Investor Day in January.

Thank you.

Thank you. Good morning guys. Patrick, you mentioned sales trends have been more volatile in the past few months and I apologize if I missed this, but did you see what you thought was causing the volatility?

I was referencing international. And so international over the course of 2017 was a little more volatile than it depends and it was really from some specific markets.

Yes. I mean, the primary one was we sold more food per order, a little of that was probably due or was due to the Bread Twists brand. We were on TV early in the quarter on that. There is always some coupon mix that goes on and in quarter four that happened to help us a little bit on ticket, but it’s mostly those two things.

Okay. And then just lastly did the company pay annual cash bonuses at a target level or above in ‘17 or how do they compare year-over-year with ‘16?

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

Great. Thank you.

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

Yes. Stephen, great question, we are not going to disclose how much of the comp get eaten by splits. And again we would just point you to the 3 to 6 range for global comps and the 8 to 12 on retail sales. Is there an impact, yes there is, but again we think that really distracts from the more important question, which is how you would profitably grow retail sales in total. And obviously, again being led by international with and above range again when you strip out FX above that 12% range for that business, it’s more above the all in retail sales than it is about how much impact you split back here or there.

Alright. Thank you.

Great. Thank you very much. Two questions, one Patrick, I know just on the U.S. comp, it’s been discussed I know you said you feel good about the trends and you are leading the industry, I know it was talked about that the comp trend did slow on a 1-year and 2-year basis, I am just wondering if you don’t think it’s anything perhaps internal and I think you mentioned carryout and delivery are both doing great and digital since you are doing well, wondering if there is anything you are seeing in terms of what would attribute to that or perhaps maybe the industry slowdown a little bit I don’t know how with what regularity you get that industry data, but I know in the past you talked about the industry growing maybe 1% to 2%, maybe you are seeing some sort of a modest industry slowdown that would attribute to the more recent easing of the U.S. comp? And then I had one follow-up.

Yes. Jeff, so first of all, I guess as we iterate, we are rolling over a 12.2 from the previous year. We had a half a point shift out of the fourth quarter into the first quarter of this year. We feel very, very good about the overall. And in terms of the industry we are not seeing anything that is showing really acceleration or deceleration materially over the ongoing trend.

Got it and Jeff can you just remind us, because you have revenue streams from the franchisees and the company and then the supply chain, an incremental point of comp on an annual basis ballpark what’s the annual EPS both for I guess U.S. and international or combined?

Yes. We know that math. We don’t give that math out. But a point of comp particularly if it’s from orders is very good for us.

Good to know. And just lastly, the cash return I mean, I know you talk about the balancing share repo and dividend, and more recently it’s been more about the repo, the dividend right now, I know would be – the healthy increase you just made, it’s still roughly 1% yield, which is kind of the low end of peers, I am just wondering what would – why wouldn’t you maybe be more in line with peers in that 2% plus type range and obviously you have the strong free cash flow and still have the flexibility to kind of do as you will in terms of the repo, is there something that kind of keeps you more cautious in terms of upping the dividend even further?

Yes. It’s Jeff, again. We returned $84 million to shareholders in the form of our ordinary dividend, Board just increased like 20%, which was on 20% plus, which was on 20% plus from the years before. And so while dividend yields is one metric, we obviously track and we care somewhat about we are also very interested in what the dividend payout ratio is and some other things. And what I would tell you is at the end of the day it is a healthy dividend. We don’t get to control the stock price directly, so still has the chance to bounce around, but $0.55 a quarter dividend in 2018, we believe is a healthy return to shareholders in that form.

And one thing I would add is we have always talked about the fact that we are agnostic on how we use our cash, but if you look backward our return on investment for our shareholders on our decisions to buy shares have been extraordinarily strong. And so there is a balance in how we are approaching it. We are continuing to move the dividend up with the latest announced increase. But we have generated pretty darn good returns with the buybacks.

Absolutely. Thank you.

Hi. Thank you. One question and then one follow-up on technology spend, in the past I know you said you are going to invest first the company and we will continue to see you invest and grow G&A, but I think sometimes we are seeing companies prioritizing that, and then top line has sort of decelerated and they need to find ways to maybe balance that, so I guess to the extent that maybe your comps are to fall globally more in line with that 3% to 6% range rather than above is there any way for us to think about that investment side, the growth OpEx if you will, and how that might vary with top line? And then I guess that I do have a follow-up please.

Yes. I will go back to repeating what we have said at Investor Day. And I think earlier today which is the investments that we are making both on the G&A front and capital investments are what is going to continue to drive our projection of 8% to 12% global retail sales growth. And we feel good about how we performed against that previously. And we are going to continue to invest do it. But we don’t start from a projection of sales and then work backwards to how much we can afford to spend. We look at the investment opportunities that are in front of them in front of us, what we think the odds are of those investments that generate return for our shareholders and as long as that expected return is strong we are going to continue to invest.

Okay. Thank you. That makes sense. And then the follow-up is you talked about with respect to technology and delivery meaning to do it in-house if it’s going to be competitive advantage, one thing I was curious was, do you think is possible for a company to acquire kind of technology and delivery expertise sort of in one fell swoop or is that something that has to be grown organically in an organization over time? I guess is there any way to kind of leapfrog through a big acquisition of talent and technology?

Look, broadly I mean people have acquired competitive advantage or build it themselves that’s always a choice you have. But I think ultimately if you are using a third-party that is available to anybody in the market by definition that’s the commodity, if anybody can access it. So could you see somebody acquire that and build competitive advantage through that acquisition, I suppose if they restricted everybody else’s access through that technology after they made that acquisition. But if it continues to be available to everybody then almost by definition it is a commodity and something available to everyone. So only if you acquired it and then got everybody else off of that technology would there be an opportunity to really start to turn that into competitive advantage.

Thank you.

Thank you. Good morning and I appreciate the opportunity and it goes over an hour, so I will keep it pretty concise. A lot of questions about delivery and all the new entrants and third-party aggregators and everything, I am just curious behind of 3 to 6 domestic 3-year to 5-year of same-store sales guidance, what is embedded in there or what’s your outlook for the delivery growth category for overall food if you can just remind us? Thank you. And then I have a follow-up.

I don’t know that we have got a specific assumption around how that’s going to grow. What you have seen so far is that people have talked about this being incremental to their business. There has been no incremental growth of the restaurant category. So I frankly would take issue with the idea that this is incremental within the overall industry. What I think you have seen is some people’s takeaway business or on-premise business to-date shifted to delivery. So as long as all that’s happening is it’s shifting from for one restaurant chain from a carry-out transaction to a delivery transaction for our purposes in projecting our business, I don’t know that it really makes any difference. Overall, I guess I would give the same answer you have heard from me many times, which is we just have not seen a really significant effect from this. And if we can identify it, it is still relatively small that it’s had an impact on our business.

Okay. Thank you for that color. And then just a last question for keeping, you mentioned a little bit about the facility coming on domestically, is there any inefficiencies that we should see or sort of factor into our first half of ‘18 and the margin assumptions until that facility is fully efficient or is it going, is capacity going to be met pretty quickly and it will be up and running and not a drag on margins?

So we are not giving guidance specifically around supply chain margin short-term or long-term. But what I can tell you is when we open up the facilities outside of New York there will be a lot of costs, but also some transportation saving that we are able to capture there. On a net basis, over the medium term, I don’t expect the supply chain margins dramatically to be volatile whether it would be in Q4 or the first half of next year, but again we are not giving specific guidance around it, but again I think it’s a big, big business, it’s a $2 billion revenue business, bringing on a very large center in the Northeast is a big deal, but it’s not something that I think is going to cause seismic shifts in margins.

What was the date for opening?

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

Thank you.

Hi, good morning, just quick ones for me, first do you have some paper or notes that are callable in April, I think it’s 493 million kind of 3.48% rate, I am curious to know if you would go to market today how that rate would look, one. And then two, I know you don’t have a formal targeted leverage ratio, but given U.S. tax reform I would be curious to hear your thoughts on leverage ratios today versus what you are thinking about in the past?

Yes. I will take the last one first, which is tax reform, obviously we are a big winner on that and that helps us in everything. First and foremost, it just gives us that much more confidence to go faster on investing and all the things that are going to grow the retail sales. But it also is likely that some of that will fall up in the bottom and we will adjudicate that, as we do all free cash flow decisions whether it would being a buyback or a dividend etcetera. On the leverage itself, we have generally said 3 to 6 turns of EBITDA, the result of tax reform means that we can do a little bit more than that comfortably. Although at the same time, we are not ready to say that we are going to move the top range target up, because the cost of equity is the funny thing. Our shareholders need to be comfortable and we know it took us about a decade to train you all that 6 turns of leverage was good for our business model. And so we are not ready yet to say that we are going to go any higher than that. As far as specific piece of debt we have from the 2015 deal, which is part callable in a couple months, again nothing to announce on that, we are always looking at what the market is doing and what the rates are. We have seen a flattening as you know the yield curve for longer term stop looks a little bit more attractive than maybe the shorter term stop, but again that sounds around quite significantly and really nothing to announce on that.

Great. Thank you.

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